DIRECTORATE-GENERAL FOR INTERNAL POLICIES · 3. THE IMPACT OF BREXIT ON THE CAP BUDGET 25. 3.1....

DIRECTORATE-GENERAL FOR INTERNAL POLICIES

Policy Department for Structural and Cohesion Policies

AGRICULTURE AND RURAL DEVELOPMENT

Research for AGRI Committee -

Implications of ‘Brexit’ for the EU

agri-food sector and the CAP:

budgetary, trade and institutional

issues

WORKSHOP

This document was requested by the European Parliament's Committee on Agriculture and

Rural Development.

RESPONSIBLE FOR THE POLICY DEPARTMENT

Research manager: Albert Massot

Project and publication assistance: Virginija Kelmelytė


European Parliament

B-1047 Brussels

E-mail: [email protected]

LINGUISTIC VERSIONS

Original: EN

ABOUT THE PUBLISHER

To contact the Policy Department or to subscribe to its monthly newsletter please write to:

[email protected]

Manuscript completed in November 2017.

© European Union, 2017.

Print ISBN 978-92-846-2354-9 PDF ISBN 978-92-846-2353-2

doi:10.2861/965335doi:10.2861/947214

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Implications of ‘Brexit’ for the EU

agri-food sector and the CAP:

budgetary, trade and institutional

issues

WORKSHOP

Abstract

This is the reference document of the Workshop on ‘The Implications of ‘Brexit’

for the EU agricultural sector and the CAP’ of 9th November 2017, organised by

COMAGRI and the Policy Department B. The purpose of this Workshop was to

examine and debate the main budgetary, trade and institutional issues related to

the Brexit process at the current state of negotiations.

This document is structured in three parts:

1. Possible impact of Brexit on the EU budget and, in particular, CAP funding.

2. EU - UK agricultural trade: state of play and possible impacts of Brexit

3. Possible transitional arrangements related to agriculture in the light of the

future EU - UK relationship: institutional issues

November 2017

PE 602.013 EN


3

TABLE OF CONTENTS

Possible Impact of Brexit on the EU Budget and, in

Particular, CAP Funding 5

EU - UK Agricultural Trade: State of Play and Possible

Impacts of Brexit 41

Possible Transitional Arrangements Related to

Agriculture in the Light of the Future EU - UK

Relationship: Institutional Issues 107


4





Possible impact of Brexit on the EU

budget and, in particular, CAP funding

STUDY

Abstract

This note assesses possible consequences of Brexit for the EU budget and

the Common Agricultural Policy. It discusses the importance of the ‘Brexit

bill’ and the loss of the British net contribution. Furthermore, it describes

how the EU budget and spending on the Common Agricultural Policy can

be adjusted to the new situation and estimates how the different options

would affect EU Member States and their net balances.

IP/B/AGRI/CEI/2017-086 October 2017

PE 602.007 EN


Rural Development.

AUTHORS

Jacques Delors Institut – Berlin: Jörg Haas

Notre Europe-Jacques Delors Institute: Eulalia Rubio



Policy Department for Structural and Cohesion Policies, European Parliament

LINGUISTIC VERSIONS

Original: EN

ABOUT THE PUBLISHER

To contact the Policy Department or to subscribe to updates on our work for the AGRI

Committee please write to: [email protected]

Manuscript completed in October 2017

© European Union, 2017

Please use the following reference to cite this study:

Haas J, Rubio E, 2017, Research for AGRI Committee – Possible impact of Brexit on the EU

budget and, in particular, CAP funding, European Parliament, Policy Department for Structural

and Cohesion Policies, Brussels

Please use the following reference for in-text citations:

Haas, Rubio (2017)

DISCLAIMER






Possible impact of Brexit on the EU budget and, in particular, CAP funding

7

CONTENTS

LIST OF ABBREVIATIONS 9

LIST OF TABLES AND FIGURES 10

EXECUTIVE SUMMARY 11

1. INTRODUCTION 13

1.1. Objectives and methodology 13

1.2. Basic features of the EU budgetary system 14

2. THE IMPACT OF BREXIT ON THE EU BUDGET 17

2.1. One-off effects: The ‘Brexit bill’ 18

2.2. Structural effects: The ‘Brexit gap’ and the different scenarios to adjust to it 21

3. THE IMPACT OF BREXIT ON THE CAP BUDGET 25

3.1. Basic features of the CAP budget 25

3.2. How Brexit can alter debates on post-2020 CAP spending 28

3.3. Estimating the Brexit effect on the CAP: data and methodology 29

3.4. Current CAP net balances 30

3.5. Adjusting the CAP to Brexit 31

4. CONCLUSIONS AND RECOMMENDATIONS 37

REFERENCES 39


8


9

LIST OF ABBREVIATIONS

AMIF

CAP

COMAGRI

EAGF

EARDF

EIB

ESIF

ISF

MFF

OBB

OR

ORD

RAL

TFEU

TOR

Asylum Migration and Integration Fund

Common Agriculture Policy

Committee on Agriculture and Rural Development

European Agriculture Guarantee Fund

European Agriculture Rural Development Fund

European Investment Bank

Europan Structural and Investment Fund

Internal Security Fund

Multiannual Financial Framework

Operating Budgetary Balance

Own Resources

Own Resources Decision

Reste-a-Liquider

Treaty on the Functioning of the European Union

Traditional Own Resources


10

LIST OF TABLES

Table 1

Main components and relative size of CAP budget 2014-2020 26

LIST OF FIGURES

Figure 1

The impact of a €10 billion increase in contributions on Member States’ net balances 22

Figure 2

Spending cuts in comparison 23

Figure 3

CAP pre-allocations per Member State, 2014-2020 (in € million, at current prices) 27

Figure 4

Relative importance of pillar 1 and 2 per Member State 27

Figure 5

CAP net balances of EU Member States, 2014-2016 average 30

Figure 6

Estimated change in CAP net balances resulting from a €3 billion increase in national

contributions 32

Figure 7

Estimated change in CAP net balances resulting from a €3 billion CAP spending cut 33

Figure 8

Estimated change in CAP net balances resulting from a €10 billion CAP spending cut 33

Figure 9

Estimated change in CAP net balances resulting from a €10 billion reduction in CAP

pillar 1 spending 34

Figure 10

Estimated change in CAP net balances resulting from a €10 billion reduction in CAP

pillar 1 spending (only old Member States) 35


11

EXECUTIVE SUMMARY

This in-depth analysis assesses possible consequences of Brexit for the EU budget and, in

particular, the Common Agricultural Policy (CAP).

We discuss how the negotiations about the ‘Brexit bill’ could affect the current and the

post-2020 Multiannual Financial Framework (MFF), and CAP spending in particular.

We analyse how Brexit affects the EU budget structurally and how the EU can adjust

to the expected budget shortfall.

We offer a quantitative assessment of the impact of Brexit on CAP net balances,

including different adjustment scenarios and estimates of their impact on the remaining

Member States.

The Brexit bill

Negotiations about the so-called ‘Brexit bill’ or ‘financial settlement’ will determine the extent

to which the UK pays its share of the financial obligations jointly undertaken by EU countries

while the UK was member of the EU.

At the moment of writing, negotiations on the Brexit financial settlement are in

deadlock. The EU has published its position on the matter but the UK has so far refused

to detail which obligations it recognises.

The implications of the Brexit bill negotiations for CAP spending depend not

only on the overall size of the bill agreed but on the type of financial obligation

covered. If the UK accepts to contribute to the EU budget until the end of MFF but

does not cover RAL pending in 2020, both EARDF and EAGF spending will be preserved

until 2020 but negotiations about the next MFF will be complicated by an unexpectedly

large amount of RAL.

The Brexit gap

We estimate that Brexit will leave a permanent shortfall of €10.2 billion per year in the

EU budget. This gap has to be filled either through higher national contributions, spending

cuts, a combination of both, or the introduction of new Own Resources.

According to our calculations, an increase in contributions disproportionally

affects some of the EU’s largest net contributors such as Germany, The

Netherlands and Sweden. In part, this is because they currently benefit from a ‘rebate

on the rebate’ on their contributions that will no longer apply once the UK leaves. Brexit

not only increases the financing burden on the EU-27, it also changes how the burden

is shared.

The Brexit gap can also be addressed by reducing spending. It is, however, important

to stress that the required savings are substantial compared to many EU programmes.

Therefore, large spending categories like CAP are likely to come under pressure

if the EU budget is cut.

There is no default method for adapting the current MFF to the departure of a Member

State.


12

Brexit and the CAP

We estimate that the British net contribution in the field of CAP amounts to €3 billion

annually. However, spending cuts after Brexit could exceed that sum if other EU programmes

are prioritised. We outline how the CAP can be adjusted to Brexit and what the implications

for Member States are:

Higher contributions affect today’s biggest net contributors the most. If the

current CAP spending levels are maintained after Brexit, Member States’ contributions

to the CAP must increase by €3 billion. We estimate that in this scenario, large net

recipients like Poland and Greece are almost unaffected. Austria, Germany, The

Netherlands and Sweden lose the most in relative and in absolute terms. Generally,

net contributors pay for the lion’s share of the shortfall, which increases imbalances in

the CAP.

Reducing CAP spending puts a higher burden of adjustment on CAP net

recipients. Our estimates suggest that cutting expenditure by a relatively small

amount like €3 billion has a mixed effect. Among the largest losers in this scenario are

CAP net contributors like Germany and The Netherlands, but also net recipients like

Spain and Poland.

If CAP expenditure is cut by €10 billion, net contributors gain. At the same time, the

losses of net recipients are significant in this scenario, not only in absolute terms, but

also compared to government spending in relatively poor countries like Bulgaria.

Conclusions and recommendations

There is no pain-free way of adjusting CAP spending to the Brexit gap.

However, the budgetary impact of the different reform options is in most cases limited

when compared to general government spending.

The EU should be careful about linking the agreement on the Brexit bill to an

agreement on a future and hypothetical transitional period, as proposed by the

UK. Moving to the second phase without any clear agreement on the Brexit bill could

enable the UK to use money as a bargaining chip when negotiating the future

relationship between the EU and the UK.

The EU’s first priority in the Brexit bill negotiations should be to minimise the

adverse financial impact of Brexit on the current and future MFF. If concessions

are needed, they can come from other elements of the deal such as the UK’s

participation in EU bodies and funds, payment for pensions and other employees’

benefits or payment for contingent liabilities.

Bargaining about budget cuts and contribution increases should not be limited

to one spending area, but include the entire system of EU finances. For example, net

contributors might be more willing to accept further increases in their payments if the

overall budget is reformed.

While Brexit can provide the narrative for a profound reform in the architecture of the

CAP, aimed not only at reducing overall CAP spending but at rendering CAP more

effective and sustainable, a major revision of CAP might not be feasible before 2022 or

2023, with implementation starting in 2024 or 2025.


13

1. INTRODUCTION

KEY FINDINGS

EU expenditure is planned through annual budgets and Multiannual Financial

Frameworks (MFF). MFFs are adopted unanimously by the Council whereas annual

budgets are subjected to qualified majority voting.

Most EU expenditure is entered into the budget through differentiated appropriations.

The stock of unpaid commitments at a given point of time is known as ‘RAL’

or reste-à-liquider.

The EU budget is mostly financed by national governments’ GNI-based

contributions. The UK enjoys a permanent rebate on its contribution, granted in the

Own Resource Decision (ORD). Austria, Germany, the Netherlands and Sweden have

been granted a rebate based on the British rebate.

1.1. Objectives and methodology

This in-depth analysis assesses possible consequences of Brexit for the EU budget and, in

particular, the Common Agricultural Policy (CAP). It provides input for the workshop

‘Implications of Brexit for the EU agri-food sector and the CAP: budgetary, trade and

institutional issues’, organised by the Committee on Agriculture and Rural Development

(COMAGRI) and the Policy Department B of the European Parliament. The note includes:

A discussion of the main issues at stake in the negotiations about the so-called

‘Brexit bill’ and the implications of different outcomes for the current and post-2020

Multiannual Financial Framework (MFF) and for CAP spending in particular.

An analysis how Brexit affects the EU budget structurally and how the EU can

adjust to the expected budget shortfall.

A quantitative assessment of the impact of Brexit on CAP net balances,

including different adjustment scenarios and estimates of their impact on the remaining

Member States.

We define the net balance as a Member State’s VAT- and GNI-based contributions to

the EU budget minus total EU spending in the country. We do not take into account

Traditional Own Resources (TOR) because they are direct EU revenues that are merely

channelled through Member States. Furthermore, unlike the European Commission’s

‘operating budgetary balances’ (which exclude administrative spending), the net balances we

report are not supposed to be a measure of fairness, but rather an indicator of Member States’

material interests.

In accordance with the terms of reference provided by the European Parliament, the analysis

of the impact of Brexit on CAP spending is based on the current CAP budget for 2014-2020

and the institutional framework adopted by the European Institutions concerning the Brexit

negotiations. This note does not take a position on the question what the appropriate level of

CAP spending is and it does not evaluate possible options for reforming CAP.


14

1.2. Basic features of the EU budgetary system

The EU budget has some particular features that distinguish it from national budgets. A crucial

distinctive aspect is the fact that it is expenditure-led (resources are raised to match what is

needed to cover the agreed level of EU expenditures). This, together with the fact that the EU

budget is mostly financed through Member States’ direct transfers, explains the existence of

various mechanisms and rules aimed at guaranteeing budgetary discipline and ensuring an

orderly development of expenditure over time.

1.2.1. Annual budgets and the Multiannual Financial Frameworks (MFF)

EU expenditure is planned through annual budgets and Multiannual Financial Frameworks

(MFF) covering a period “of at least five years”. MFFs are not multi-annual budgets. They do

not set actual expenditure figures but provide a framework for financial programming and

budgetary discipline that has to be respected by annual budgets. In particular, the MFF sets

the maximum annual amount of resources (‘ceilings’) that the EU can allocate

(‘commitments’) to each category of expenditure (‘heading’). It also set an overall

annual ceiling for payments.

The MFF is a legally binding act agreed unanimously by the Council and approved by

majority in the European Parliament. It can be amended in response to “unforeseen

circumstances” but any revision of the MFF needs to be adopted following the same procedure.

Art 312.4 of the Treaty on the Functioning of the European Union (TFEU) also stipulates that,

if there is no agreement on the next MFF at the end of the previous financial framework, “the

ceilings and other provisions in place for the final year of the expiring MFF shall be extended

until such time as that act is adopted”.

Based on the MFF, the EU adopts annual budgets. They are proposed by the

Commission and adopted by both the Council and the European Parliament through

a procedure which is similar but shorter than the EU´s ordinary legislative

procedure1. In particular, the Council adopts annual budgets with a qualified majority (and

not with unanimity as is required for the MFF). Annual budgets correspond to the calendar

year and must be agreed by the end of the preceding year. If no agreement is reached in

time, the previous annual budget is rolled over on a monthly basis (the Commission is

authorised to continue equivalent spending on a monthly basis through the system of

‘provisional twelfths’)2. Annual budgets can be modified through draft amending budgets,

which are subject to the same procedures for adoption as the annual budget.

1.2.2. Differentiated appropriations: commitments and payments

EU expenditure is usually expressed in two different figures: commitment appropriations

(legal pledges to provide funds, provided that certain conditions are fulfilled) and payment

appropriations (cash or bank transfers to the beneficiaries). Annual commitments and

payments often differ. This is particularly the case for cohesion programmes, as commitments

are entered into the budget during the initial year of implementing the programme and

payments are stretched over various years. Differentiated appropriations give rise to

1 See Article 314 of the Treaty on the Functioning of the European Union (TFEU) for a detailed description of the

annual EU budgetary procedure. 2 Art 315 TFEU, “If, at the beginning of a financial year, the budget has not yet been definitively adopted, a sum

equivalent to not more than one twelfth of the budget appropriations for the preceding financial year may be spent

each month in respect of any chapter of the budget in accordance with the provisions of the Regulations made

pursuant to Article 322; that sum shall not, however, exceed one twelfth of the appropriations provided for in the

same chapter of the draft budget”.


15

outstanding commitments (also known by its French acronym RAL3), which is the total

amount of appropriations that the EU has committed to pay but not yet paid at a certain point

in time. Outstanding commitments represent a budget liability for the EU.

It is also important to note that there are a few categories of EU expenditures for which this

rule does not apply and commitments and appropriations coincide (non-differentiated

appropriations). This is the case in particular for most spending under the European

Agriculture Guarantee Fund (EAGF)4.

1.2.3. Own Resources, corrections and the balanced-budget rule

The budget of the European Union is financed by so-called ‘Own Resources’, other revenue5

and the surplus carried over from the previous year. Own Resources can be defined as

“revenue allocated irrevocably to the Union to finance its budget and accruing to it

automatically without the need for any subsequent decision by the national authorities”6.

There are three main categories of Own Resources:

Traditional Own Resources (TOR), which comprise customs duties and agricultural

levies collected by Members States on behalf of the EU (13% of total EU revenues in

2015).

Member State’s VAT-based contributions, derived from the application of a

uniform call rate to a notionally harmonized VAT base determined uniformly for the

Member States (12% of total EU revenues).

Member States’ GNI-based contributions, resulting from the application of a

uniform call rate to total EU GNI, to match the total volume of resources to the total

volume of expenditure (69% of total EU revenues).

Own Resources are defined and fixed in a Council Decision (the Own Resources Decision –

ORD)7. This Decision is conceived in principle to cover the same period as the respective MFF.

In practice, however, ORDs do not have an expiration date and continue to be valid

until a new decision enters into force. Since ORDs are approved unanimously by all

Member States and ratified by all Member States’ national Parliaments, a long time can pass

until a new ORD enters into force.

The ORD also includes various provisions granting particular corrections to certain Member

States. The most important one is the correction in favour of the United Kingdom, popularly

known as the UK rebate. This provision allows the UK to be reimbursed 66 % of the difference

between its contribution and what it receives back from the EU budget. The formula to

calculate the UK rebate is complex and it has been amended a number of times8. In particular,

in 2007, it was decided that EU structural and cohesion expenditure allocated to new Member

States - including spending from the European Agriculture Fund for Rural Development

3 Reste à Liquider. 4 Only a tiny part EAGF expenditures, implemented through direct management (e.g. financing of actions to promote

agriculture products and the establishment of agricultural accounting information or survey systems) are entered

as differentiated appropriations. See Art. 169 of Regulation No 966/2012 on the financial rules applicable to the

general budget of the Union (“Financial Regulation”). 5 Other revenue includes contributions from non-EU countries to certain programmes, interest on late payments,

fines, and other diverse items. They represent a minor part of total EU revenues (6.9% in 2015). 6 Monti, Mario et al (2016), Future financing of the EU. Final report and recommendations of the high level group

on own resources, Brussels, p. 20. 7 Council Decision of 26 May 2014 on the System of Own Resources of the European Union (2014/335/EU, Euratom). 8 The subject is discussed in detail in D’Alfonso, Alessandro (2016), The UK 'rebate' on the EU budget. An

explanation of the abatement and other correction mechanisms. European Parliamentary Research Service

Briefing, February 2016.


16

(EAFRD) - would be excluded from the calculation of the rebate. This adjustment was meant

to ensure that the UK would help finance the costs of EU enlargement.

The UK rebate for year N is financed by higher contributions from the remaining EU Member

States in year N+1. The additional payments are calculated based on the share they contribute

to the EU's GNI-based own resource. However, four countries (Germany, the Netherlands,

Austria and Sweden) pay only 25 % of their normal financing share. This correction is popularly

known as the ‘rebate on the rebate’.

The ORD includes several other corrections which only apply for the period 2014-

2020. In particular, some countries benefit from gross reductions in their GNI-based

contributions in specific years9 and Germany, the Netherlands and Sweden benefit from a

lower VAT call rate, which reduces their VAT-based contribution to the EU budget.

Finally, it should be noted that the GNI-based own resource plays a special role, not only

because of its relative importance (it accounts for almost 70% of the total income) but because

it is the EU’s residual revenue source. A uniform GNI call rate is fixed each year as part of the

budgetary procedure, and it is determined by the additional revenue needed to finance the

expenditure not covered by the other resources (VAT-based payments, TOR and other

revenue). In this way, the GNI resource ensures that Art. 310 TFEU is respected, which

stipulates that “revenue and expenditure shown in the budget shall be in balance”.

1.2.4. Ceilings – maximum amounts to spend

The EU budget is subject to various ceilings. The MFF sets annual ceilings for commitment

appropriations under each heading and overall annual ceilings for commitments and

payments. The ORD establishes an annual own-resource ceiling for payments, which is the

maximum amount of own resources the EU may raise during a year to cover annual

appropriations for payments.

The MFF establishes annual ceilings on payments both in absolute terms and as a percentage

of the EU's estimated GNI. Each year, the Commission recalculates this percentage on the

basis of the latest available GNI forecasts and publishes it in the MFF technical adjustment.

This serves to check that the EU's total estimated level of payments is below the annual Own

Resources ceiling established by the ORD, which is currently fixed at 1.23 % of the EU's GNI.

Since the mid-2000s, Member States’ largest net contributors to the EU budget have insisted

on the need to keep the size of the MFF at 1% of EU GNI. This 1% ‘political ceiling’, which

is usually interpreted as applying to payment appropriations10, has weighed heavily on the

last two MFF negotiations.

9 Art 2.5 Own Resources Decision: “For the period 2014-2020 only, Denmark, the Netherlands and Sweden shall

benefit from gross reductions in their annual GNI-based contribution of EUR 130 million, EUR 695 million and EUR

185 million respectively. Austria shall benefit from a gross reduction in its annual GNI-based contribution of EUR

30 million in 2014, EUR 20 million in 2015 and EUR 10 million in 2016”. 10 During the 2007-2013 MFF negotiations, the 1% GNI position was first interpreted as relating to commitment

appropriations and at a later stage in the negotiation to payment appropriations (see European Commission, EU

Public Finances, 5th edition, p.82). In the latest MFF negotiation, the request from Member States’ net contributors

was to stabilise spending in real terms at the 2013 level, which was in practice equivalent to keep payment

appropriations at 1% of EU GNI (even if, in the end, pressure to lower payments from some Member States led

to the establishment of payment appropriations below the 1% GNI target).


17

2. THE IMPACT OF BREXIT ON THE EU BUDGET

KEY FINDINGS

Brexit could have a number of different budgetary consequences for the EU.

Apart from leaving a permanent gap in the EU budget, the departure of the UK may

alter the dynamics of budgetary negotiation in the Council. The removal of the UK

rebate can also open the door to a reform of the EU’s financing system.

The implications of the Brexit bill negotiations for CAP spending will depend

not only on the overall size of the bill agreed but on the type of financial

obligation covered. If the UK accepts to pay its annual contribution to the EU

budget until the end of MFF, both EARDF and EAGF spending will be preserved until

2020 but negotiations about the next MFF will become more difficult.

Brexit is likely to leave a structural shortfall (or ‘Brexit gap’) of about €10

billion per year in the EU budget that has to be balanced by higher contributions

or lower spending.

We estimate that an increase in contributions would disproportionally affect

some of the EU’s largest net contributors such as Germany, The Netherlands

and Sweden. In part, this is because they currently benefit from a ‘rebate on the

rebate’ on their contributions that will no longer apply once the UK leaves

The Brexit gap can also be addressed by reducing spending. It is, however,

important to stress that the required savings are substantial compared to many EU

programmes. Therefore, large spending categories like the CAP are likely to

come under pressure if the EU budget is cut.

There is no default method for adapting the current MFF to the departure

of a Member State. Since any modification requires unanimity, it seems possible

that the current MFF remains unchanged and the European Commission covers the

shortfall by increasing GNI-based contributions if needed.

Brexit, if it occurs, affects the EU’s public finances in several ways. First, negotiations about

the so-called ‘Brexit bill’ or ‘financial settlement’ will determine the extent to which the UK

pays its share of all financial obligations jointly undertaken by EU countries while the UK was

member of the EU (see section 2.1). Second, Brexit will leave a permanent shortfall in

the EU budget estimated at €10 billion per year11. This gap will have to be filled either

through increasing Member States’ GNI-based contributions, spending cuts, a combination of

both or the introduction of new Own Resources (section 2.2).

Brexit may have further effects on the upcoming MFF:

The departure of the UK may change the dynamics of negotiation in the Council.

The UK government played a crucial role in the final stage of the last MFF negotiations,

forcing a significant reduction in the overall ceiling for payments.

Brexit will lead to an increase the size of the EU budget in relative terms (as a

% of EU GNI). This is because it reduces EU GNI by approximately 17% (the British

economy’s relative weight in the EU) but the UK’s net contribution is only about 7% of

the EU budget due to the rebate it receives. Under these circumstances, maintaining

11 We already estimated a budget gap of €10 billion per year in Haas, J. and Rubio, E. (2017), Brexit and the EU

budget: Threat or Opportunity, Jacques Delors Institute, Policy Paper 183, January 2017. The paper was based

on 2014-2015 data, but the inclusion of data for 2016 has not changed this estimate.


18

the EU budget at 1% of EU GNI (which was the Council’s stance in the last two MFF

negotiations) appears difficult.

Brexit will end the UK correction mechanism and the related rebates. This opens

the door for proposals to remove all corrections in the EU financing system12 and abolish

or reform the VAT-based own resource (on which the calculation of the UK rebate is

based)13.

2.1. One-off effects: The ‘Brexit bill’

The ‘Brexit bill’ or ‘financial settlement’ refers to the expected payment the United Kingdom

has to make to the EU to honour its share of the financial commitments jointly undertaken by

EU countries while the UK was member of the EU. It does not refer to any potential future

payment related to a possible transition period between Brexit and a future EU-UK partnership

agreement.

The financial settlement is being discussed in the first phase of Brexit negotiations. Following

the ‘phased approach’ the EU requires the UK to recognise the existence of this obligations

and expects to reach an agreement on general principles concerning the nature and

composition of this payment and the methodology to calculate it. This agreement is one of the

conditions for moving to the second phase of the negotiations, in which the future EU-UK

relationship and transitional arrangements will be discussed, together with the exact amount

of the financial settlement.

At the moment of writing, negotiations about the Brexit bill are in deadlock. The EU

presented its negotiation position on the financial settlement in a paper published in June

201714, While the Commission’s paper does not name a specific figure, the Financial Times

estimates that, based on the EU negotiating position, the bill could amount to

between €91 and €113 billion, corresponding to a net payment of €55-75 billion after

considering the share of EU spending that flows back to the UK15.

The EU position paper lists the different financial obligations and liabilities to take into account

and proposes a methodology to calculate the amounts for the different items and the UK’s

share of these obligations. According to the EU, the financial settlement should include the

payment of financial obligations derived from the EU budget as well as financial obligations

related to the settlement of British participation in EU bodies (the European Investment Band,

the European Central Bank) or specific EU funds and facilities (such as the European

Development Fund, or the Facility for Refugees in Turkey). These latter ones can be technically

tricky and complex to define, but the most contested claims are those related to financial

commitments derived from the EU budget.

Generally, the EU expects the UK to pay for these commitments according to its share in

financing the EU budget after the application of the UK rebate, which is approximately

12.5%16. Taking into account the UK rebate in the calculation of the Brexit bill is logical from

12 European Commission (2017), Reflection paper on the future of EU public finances, COM(2017) 358 of 28 June

2017. 13 Monti, Mario et al (2016), op.cit. 14 European Commission Task Force for the preparation and conduct of the negotiations with the United Kingdom

under Article 50 EU, Position Paper “Essential Principles on Financial Settlement¨, TF50 (2017), 2/2, 12 June 2017 15 Barker, Alex, “Brussels hoists gross Brexit ‘bill’ to €100bn”, Financial Times, 3 May 2017. 16 12.5% is the average of UK’s net contributions during 2014 and 2015.


19

a legal point of view, as the right to this rebate is granted in the Own Resource Decision, the

same legal act that states the UK’s obligation to contribute to the financing of the EU budget.

The Commission’s paper lists five types of financial commitments derived from the

EU budget:

1. Outstanding budgetary commitments or ‘RAL’ (reste à liquider). The EU expects the

UK to cover part of the spending commitments that have been authorised in past EU annual

budgets but have not yet been executed at the moment of withdrawal. RAL amounted to

€238.3 billion at the end of 201617. Assuming that RAL increases at the end of the MFF, this

implies that at least €29.7 billion would have to be paid by the UK at the moment of

withdrawal.

2. Financial programming for the period between the withdrawal date and the end

of the MFF. The EU also asks the UK to contribute to the payment of EU spending

obligations linked to the 2014-2020 MFF but not yet committed in an annual EU budget at

the moment of withdrawal.

This is the most contested claim according to some experts18. Initially, the Commission’s

Article 50 Task Force proposed to include only some long-term spending obligations linked

to the MFF in the Brexit bill. More specifically, the Commission argued that the UK should

contribute to the financing of those spending commitments recognised as EU liabilities in

the consolidated accounts of the EU. These are commitments derived from the signature of

a contract or grant agreement with a beneficiary, such as a national or regional authority

(e.g. the signature of Operational Programmes) or a private promoter (e.g. GALILEO,

COPERNICUS or long-term infrastructure projects financed by the Connecting Europe

Facility). In 2016, the consolidated accounts of the EU reported €298 billion of such long-

term legal commitments (more than 90% of them related to ESIF spending). Assuming the

same amount at end-2108, this would imply an amount of approximately €37.2 billion to

be paid by the UK.

After exchanges with national capitals, the Commission’s initial position toughened19.

Various Member States insisted on making the UK liable not only for long-term legal

commitments identified in consolidated annual accounts, but for all planned EU spending

under the 2014-2020 MFF. In practice, this implies asking the UK to maintain its

annual net EU budget contribution until the end of MFF (approximately €10 billion

per year in net terms20) and cover its share of the RAL on 2014-2020 commitments

pending in 2020, which is expected to reach €254 billion (British share: €31.7 billion)21.

In total, €51.7 billion would have to be paid by the UK.

There are strong legal and political arguments to support the EU position. By adopting the

MFF in 2013, the UK government committed to financing the EU’s long-term budget for the

whole period. Most 2014-2020 spending commitments constitute legal obligations for the

EU even if they are not part of an annual budget and not included in consolidated accounts,

as they derive from EU legal acts setting out the rules and specific amounts allocated to

each programme. The UK can counter that the MFF regulation obliges Member States to

adjust the MFF in the event of an enlargement (Art. 21) and that thus, 'a contrario’, the

17 European Commission, DG budget (2017), Report on budgetary and financial management. Financial year 2016,

Brussels. 18 Barker, Alex, “FT breakdown: the €100bn Brexit bill”, Financial Times, 3 May 2017 19 Barker, Alex, op.cit. 20 Notice that the UK would continue to benefit from all EU spending programmes until the end of MFF. 21 European Commission (2016), Commission Staff Working Document Accompanying the document:

Communication from the Commission to the European Parliament and the Council, Mid-term review/revision of

the multiannual financial framework 201-2020, An EU budget focused on results, 299 final, Brussels.


20

remaining EU27 should adjust the MFF ceilings and reform legal acts to reflect the fact that

one of the biggest net contributors is leaving. However, enlargement differs from

withdrawal in that it is a decision taken by unanimity by all EU Member states, not imposed

by one of them to the others.

3. EU liabilities which are not balanced by corresponding assets. The EU also asks the

UK to pay its share of EU liabilities that are recorded in the consolidated accounts and are

not balanced by corresponding assets, such as pensions and other employee benefits,

payables or financial liabilities not derived from EU borrowing. These are relatively minor

amounts. In 2016, liabilities from pensions and other employee benefits amounted to €63.8

billion overall (British share: €7.9 billion) and payables amounted to €40 billion (British

share: €5 billion).

4. Contingent liabilities. Contingent liabilities are potential liabilities that may or may not

fall due depending on the outcome of an uncertain event in the future. They relate mainly

to EU guarantees given to the EIB in the context of EFSI, the EIB external lending mandate

or other financial instruments (€25.5 billion in 2016) and EU borrowing to finance financial

assistance programmes (€54.9 billion 2016). There is a discussion on how to include these

liabilities in the calculation of the financial settlement. The EU prefers a British lump-sum

payment upfront to cover them in case they materialise in the future, and to reimburse the

UK over time if they do not. Another option could be to share the costs from contingent

liabilities as they arise in future.

5. Specific costs related to the withdrawal process. The EU’s paper asks the UK to carry

all the specific costs related to the withdrawal process, such as the costs of moving EU

agencies located in the UK.

As mentioned above, there is still no agreement on the financial settlement. Through different

public speeches, members of the UK government have formally recognised that the UK has

financial obligations to the EU but there has not been a public statement detailing which

obligations it recognises. Recently, Prime Minister Theresa May promised in her ‘Florence

speech’ on September 22 that no EU country will be required to pay more or receive less over

the remainder of the current MFF as a result of Brexit. Ms May has not provided an exact

figure but her words have been interpreted as an offer amounting to €20 billion22,

which roughly corresponds to the payment of UK’s annual net contribution to the EU budget

from the expected date of withdrawal (mid- 2019) until 2020.

The €20 billion offer is seen as insufficient by EU negotiators. It leaves out many of the financial

obligations mentioned above (pensions, contingent liabilities) and it does not recognise the

payment of a share of RAL pending in 2020. It is also worth pointing out that Theresa May’s

offer has been presented as a sort of implementation payment linked to a two-year transitional

period and not as the settlement of past debts. While this is a good strategy to ‘sell’ the bill to

the UK public opinion, the EU should be careful about linking the agreement on the

Brexit bill to an agreement about the transition towards a new EU/UK relationship.

Moving to the second phase without any clear agreement on the Brexit bill would enable the

UK to use money as a bargaining chip.

Finally, from the point of view CAP spending, it is not irrelevant which type of

financial obligation is covered.

If the UK pays its share of the RAL at the moment of withdrawal (in principle, mid-

2019) but does not contribute to the financing of the EU after this date, CAP spending

(both pillar 1 and 2) in 2019 and 2020 may be under threat.

22 Parker, G. and Barker, A. “Theresa May prepares €20bn EU budget offer”, Financial Times, 19 September 2017.


21

If the UK pays a part of the RAL at the moment of withdrawal as well as a share of

outstanding legal commitments recorded in the consolidated accounts of the EU, EARDF

funding for 2019 and 2020 will be preserved but EAGF spending will be threatened.

Finally, if – as seems to be the intention of May - the UK only recognises its

duty to maintain the annual contribution to the EU budget for the last two

years of the current MFF, both EARDF and EAGF spending will be preserved

until 2020 but negotiations about the next MFF will become more difficult. The

remaining EU27 will have to assume the UK’s roughly €31 billion share of RAL and

share the costs among themselves, on top of having to adjust the EU budget to the

permanent shortfall left by Brexit (see next section).

2.2. Structural effects: The ‘Brexit gap’ and the different scenarios to

adjust to it

While Brexit may or may not threaten planned spending in the current MFF, it is almost certain

that it will have a lasting impact on future MFFs. Since the UK pays more into the EU

budget than the EU spends in the UK, Brexit will leave a structural funding gap in

the finances of the EU27. The outcome of the Brexit bill negotiations, decisions concerning

a possible transitional period and the budgetary arrangements linked to the future EU-UK

partnership will determine the size of the gap, but it seems safe to assume that the British net

contribution post-Brexit will be lower than it is today. Anything else would likely be

unacceptable for the UK.

The exact size of the gap not only depends on the type of Brexit (soft or hard, clean or

transitional), but on several additional factors. For example, the UK’s net contribution to the

EU budget has been volatile in the past and forecasts by the British Office for Budget

Responsibility suggest that it could decrease in 2017, but increase markedly afterwards23. This

would imply a larger budget shortfall. At the same time, Brexit could also lead to new revenue,

e.g., from increased customs duties if tariffs are reinstated between the EU-27 and the UK

(although this would simultaneously depress trade volumes and the overall effect on national

budgets might well be negative)24.

In light of the uncertainties, it seems reasonable to keep matters simple. We assume that the

EU will receive no contributions from the UK after Brexit. Consequently, we estimate the ‘Brexit

gap’ by subtracting the revenue raised in the UK from EU spending in the UK. In order to

account for yearly fluctuations, we use the 2014-16 average. Over this period, the UK has

contributed an average of €17.4 billion annually, around one-eight of the EU’s total

revenue. Revenue raised via the VAT-based and the GNI-based own resource accounts for

80% of the amount. Customs duties (TOR) collected in the UK, which account for the remaining

20%, are not strictly speaking a part of the British national contribution to the EU budget, but

we still include them since they will no longer be collected after Brexit. On the other side of

the ledger, the EU spent €7.2 billion annually on programmes in the UK in 2014 and

2015. According to these figures, Brexit will leave a structural gap of €10.2 billion per

year in the EU budget25. The EU will have to increase revenue or cut spending to adjust to

this gap.

23 Keep, Matthew (2017) : The UK’s contribution to the EU budget, House of Commons Library Briefing Paper No.

CBP 7886, p. 9. 24 Núñez Ferrer, Jorge and Rinaldi, David (2016), The Impact of Brexit on the EU Budget: A non-catastrophic even,

CEPS Policy Brief No. 347. 25 For further details, see Haas/Rubio 2017.


22

We estimate the effect of Brexit on Member States by first calculating each country’s current

net balance (see section 1.1) and then comparing it to the balance that is expected if

contributions increase or EU spending decreases. We use the European Commission’s

‘operating budgetary balances’ dataset that records actual revenue and spending (instead of

projections)26.

2.2.1. Scenario 1: Higher contributions

If spending in the EU-27 is maintained, revenue needs to increase by approximately €10

billion in order to balance the budget. The GNI-based Own Resource is used to raise the

additional funds (see section 1.2.3). As a result, wealthier countries can expect to see a

larger deterioration of their net balances. In relation to their current contributions, most

Member States are evenly affected. They can expect an increase of between five and eight

per cent compared to their current gross national contributions (see figure 1).

However, Brexit not only increases the financing burden on the EU-27, it also changes

how the burden is shared. A disproportionally large increase can be expected for Austria,

Germany, The Netherlands and Sweden. This is because of the way the UK rebate is financed

today. All Member States contribute to financing the rebate, but the aforementioned countries

have secured a ‘rebate on the rebate’ that limits their contribution (see section 1.2.3). After

Brexit, the UK rebate and its associated rebates can no longer apply. A larger portion of

revenue is financed according to countries’ relative wealth (GNI key). This effect alone could

redistribute around €1.7 billion (or €15 per capita) from the four former rebate countries to

the others.

Figure 1: The impact of a €10 billion increase in contributions on Member States’

net balances.

Source: Authors’ calculations based on European Commission data on expenditure and revenue by Member States

(operating budgetary balances), as reported in EU Financial Reports for 2014-16.

Note: A Member State’s national contribution consists of the revenue generated by the VAT- and the GNI-based Own

Resource.

26 For a more detailed description of the data, see section 3.3 and Haas/Rubio 2017.


23

2.2.2. Scenario 2: Lower spending

The Brexit gap can also be addressed by reducing spending. The distributional consequences

are likely to be very different from the scenario described above. If contributions remain

broadly unchanged (except for the rebates) and spending falls, the net balances of those

Member States that receive the most EU funding today deteriorate, while the effect on

net contributors is muted. However, beyond these general considerations, the impact depends

entirely on how the cuts are distributed between the different budget headings.

It is, however, important to stress that the required savings would be substantial

compared to many EU programmes. Figure 2 illustrates this point. Since smaller EU

programmes would be devastated by deep cuts, large spending areas such as Structural

and Investment Funds and the CAP are likely to come under pressure in this

scenario.

Figure 2: Spending cuts in comparison

Source: Authors’ representation based on European Commission data and Haas, J. and Rubio, E. (2017), Brexit and

the EU budget: Threat or Opportunity, Jacques Delors Institute, Policy Paper 183.

Even after deep cuts, Brexit increases the relative size of the EU budget slightly, from currently

1% to 1.05% of EU GNI. The increase reflects the fact that the UK contributes more to EU GNI

than to the EU budget. Maintaining the current ratio (in line with net contributors’ traditional

request to keep the EU budget at 1% of EU GNI) would require spending cuts around €16

billion per year. However, the situation becomes less problematic if the currently strong

economic growth in the EU continues.


24

2.2.3. Scenario 3: No agreement

It is worth noting that there is no default method for adapting the current MFF to the

departure of a Member State. The MFF regulation for 2014-2020 states that the MFF should

be adjusted ‘accordingly’ in case of Treaty change (Art. 20)27 or enlargement (Art. 19)28, but

says nothing about the unprecedented event of a Member State requesting to withdraw. Even

if we assume that Art. 20 is applicable to withdrawals, there is ample room for interpretation

what ‘adjusting’ the MFF means29. Since any modification requires unanimity, it seems possible

that the current MFF remains unchanged and the European Commission covers the shortfall

by increasing contributions via the GNI resource if necessary30.

It may also happen that an ‘ad hoc’ solution is found to fill the gap during the current

MFF (e.g. a two-year UK-EU transitional agreement, involving the payment of UK net

contributions in 2019 and 2020) but that Member States fail to reach an agreement

on the post-2020 MFF. In this case, article 312.4 of the Treaty on the Functioning of the

European Union (TFEU) stipulates that “the ceilings and other provisions in place for the final

year of the expiring MFF shall be extended until such time as that act is adopted”. In practice,

this means that the level of spending for 2020 will be maintained until an agreement on the

new MFF is reached31.

2.2.4. Other possible scenarios

Apart from the scenarios outlined above, there are other ways to adjust to the Brexit gap. For

example, Member States could combine budget cuts and contribution increases. Another

option is the introduction of new Own Resources that make up for the budget

shortfall. Some options, such as a CO2 levy, might generate revenue without adding to

national contributions.

The introduction of new Own Resources could be part of a ‘package deal’ that

includes reforms on the expenditure side, as proposed by the report by the High

Level Group on Own Resources published in December 201632. However, a

comprehensive deal of this sort is difficult to envisage by 2020. Even if the elimination of the

UK rebate opens the door to reforms on the revenue side, the introduction of one or multiple

new revenues requires a lot of political bargaining and the approval of new Own Resource

Decisions usually takes a long time. The current ORD was proposed by the Commission in

September 2011 and was approved almost three years later, in May 2014. Assuming that the

Commission makes a proposal for a new ORD in spring 2018, Member States will only have

one year and a half to negotiate, approve and ratify the new system.

27 Art. 20 of the current MFF regulation: “Should a revision of the Treaties with budgetary implications occur between

2014 and 2020, the MFF shall be revised accordingly.” 28 Art. 21 of the current MFF regulation: “If there is an accession or accessions to the Union between 2014 and 2020,

the MFF shall be revised to take account of the expenditure requirements resulting therefrom”. 29 An interesting precedent concerning the different interpretations on how to adjust the MFF to changes in EU

membership is Croatia’s accession in 2013. Both the Commission and the European Parliament called for an

increase in the overall level of commitments to adapt to the entry of Croatia, but the Council rejected this

interpretation and called for redeployments between ceilings to cover any additional expenditure requirements

from the accession. In the end, the compromise was to keep the overall ceiling for commitment untouched but

increase the annual payment ceilings for 2013 (See European Commission, EU public finance, 5th edition,

Luxembourg: Publications Office of the European Union, 2014, pp. 93-94). 30 To be precise, revenue can only be increase until the level stated in the Own Resources Decision, which is currently

1.23% of EU GNI. In 2016, revenue from Own Resources stood at only 0.89% of GNI (cf. Amending Budget No.

6, 2016, p. 198). 31 Some could argue that this would in principle reinforce the negotiating position of net recipients vis-a-vis those of

net contributors. However, a non-agreement scenario could be also disruptive for net recipients as the stalemate

could result in major legal and financial uncertainty and problems with the disbursement of EU spending (see Haas

and Rubio, 2017). 32 Monti, Mario et al (2016), op.cit.


25

3. THE IMPACT OF BREXIT ON THE CAP BUDGET

KEY FINDINGS

Whereas the weight of CAP in the EU budget has decreased over time, CAP spending

still represents 37.8% of total EU expenditure. Most of it is allocated to direct

payments, which make up approximately 70% of the CAP budget and more than a

quarter of the EU budget.

The CAP in its current form has a large distributional impact. The four largest

net recipients of CAP funds in absolute terms are Poland, Greece, Romania and Spain,

while Germany and the UK are among the largest net contributors.

Brexit will leave a ‘CAP gap’ worth €3 billion annually, but CAP spending could

face larger reductions if other areas of the EU budget are protected from cuts.

Increasing Member State’s contributions by €3 billion predominantly affects

today’s largest net contributors and especially Austria, Germany, The Netherlands and

Sweden. This adds to imbalances in the CAP. However, the sums involved are rather

small compared to government spending.

Reducing CAP spending by €3 billion has mixed effects. Among the largest losers

in absolute terms are CAP net contributors like Germany and The Netherlands, but also

net recipients like Spain and Poland.

Reducing CAP spending by €10 billion favours large net contributors. The losses

of net recipients are significant not only in absolute terms, but also compared to their

government spending in relatively poor countries like Bulgaria, Lithuania and Romania.

3.1. Basic features of the CAP budget

The Common Agricultural Policy (CAP) is one of the EU’s oldest policies. Established in

1962, CAP has undergone significant changes through a series of reforms since 1992, but its

basic 2-pillar architecture remains unchanged.

Pillar 1 includes direct payments for farmers and market measures, and it is delivered through

the European Agricultural Guarantee Fund (EAGF).

Pillar 2 concerns rural development measures under the European Agricultural Fund for Rural

Development (EARDF).

CAP spending has shrunk over the last decades but it still represents 37.8% of total EU

expenditure. Most of it is allocated to direct payments, which make up approximately 70% of

the CAP budget and more than a quarter of the EU budget (see table 1). Pillar 2 spending

accounts for 8.8% of total EU spending.


26

Table 1. Main components and relative size of CAP budget 2014-2020

EUR million

(2011 prices)

As % of MFF

spending

CAP budget 2014-2020 362 827 37.8%

Pillar 1 277 851 28.9%

Of which: direct payments 265 153 27.6%

Pillar 2 84 976 8.8%

Source: Council Regulation No 1311/2013, EU regulation 73/2009. EU regulation 1307/2013 and EU Regulation

1305/2013

Both direct payments (EAGF) and rural development measures (EARDF) are implemented

by national authorities, following the principle of shared management. Direct payments

are 100% financed by the EU whereas rural development measures are subjected to

co-financing, with different co-financing rates applied depending on the type of rural area

for which support is intended and the measures co-financing.

CAP commitments under shared management – that is, spending for direct payments

(EAGF) and for rural development (EARDF) – are pre-allocated to Member States at

the beginning of the MFF. In particular, the European Council’s agreement on the MFF set

the overall CAP budget and indicative annual break-downs per Member State, which are later

on negotiated with the European Parliament and included in the EAGF and EARDF legal acts.

The distribution of CAP spending per Member States takes as basis the amounts received by

Member States in the last year of the expiring MFF (and therefore is strongly path dependent),

but it is also the outcome of a political bargaining which takes into account other criteria as

well as budgetary concessions on other policies.

Figure 3 shows CAP pre-allocations per Member State for the period 2014-2020. If we look at

the distribution of CAP pillar 1 spending by Member State, we can notice that the biggest

beneficiaries are Western European countries (France, Germany Spain, Italy). This is partly

explained by historical differences as regards to the level of generosity of direct payments per

hectare. As part of the MFF agreement, it was convened that Member States’ differences in

direct payments would be gradually reduced between 2015 and 2020 via a process known as

‘external convergence’. Through this process, Member States with average direct payments

per hectare above the EU average will see their allocation progressively reduced in order to

finance the increase in those Member States with an average direct payments below 90 % of

the EU average. While the MFF ‘external convergence’ has entailed a redistribution of EAGF

funding, mostly from Eastern to Western European countries, it has not altered the ranking of

countries in terms of EAGF allocations.


27

Figure 3: CAP pre-allocations per Member State, 2014-2020 (in € million, at

current prices)

Source: European Commission, DG BUDGET website. http://ec.europa.eu/budget/mff/preallocations/index_en.cfm

Note: Allocations before transfers between pillars.

Looking at pillar 2 pre-allocations, the distribution between Member states is more

balanced. Following the Commission’s proposal, the allocation of rural development funds per

Member State was made on the basis of more objective criteria than in the past. There were

however a series of discretionary allocations made to 16 different Member States, particularly

to compensate some of them for lower pillar 1 allocations due to external convergence. Figure

4 shows the relative importance of pillar 1 and pillar 2 allocations per Member State.

It is worth noting that pillar 1 spending tends to be more important in Western European

countries. Having said this, there are also important exceptions. For example, the EAGF

accounts for less than 60% of total CAP spending in Austria and Portugal. As discussed in

section 3, this factor is likely to influence Member States’ positions with regards to adjusting

the CAP to Brexit.

Figure 4: Relative importance of pillar 1 and 2 per Member State

Source: European Commission, DG BUDGET website. http://ec.europa.eu/budget/mff/preallocations/index_en.cfm

Note: Allocations before transfers between pillars.

http://ec.europa.eu/budget/mff/preallocations/index_en.cfm

http://ec.europa.eu/budget/mff/preallocations/index_en.cfm


28

Finally, it should be taken into account that the current MFF allows Member States to

transfer funds between pillars, up to 15% of the original amounts. Those Member

States with average direct payments per hectare below 90 % of the EU average are allowed

to transfer up to 25% of the support they receive for rural development to Pillar I. So far, 11

countries have used this option to move part of their direct payment allocations to the rural

development policy and four Member States (Poland, Hungary, Slovakia and Croatia) have

increased their direct payments allocations using part of their rural development funds. The

net transfer from pillar 1 to pillar 2 over the 2014-2020 period has amounted to around €4

billion33.

3.2. How Brexit can alter debates on post-2020 CAP spending

CAP spending was already under pressure before the UK decided to leave the EU.

During the last MFF negotiations, which took place against the backdrop of budgetary

cutbacks, there was a general expectation that the CAP budget would be cut significantly to

free up resources for new spending priorities. In the end, there was no dramatic reduction in

CAP spending but an agreement to progressively reduce it in real terms34.

During the next round of MFF negotiations, calls for lower CAP spending could become louder.

Depending on the strategy chosen to cover the Brexit gap, two different political dynamics

could threaten the CAP:

If EU spending is reduced to balance the EU budget, the largest spending categories

will be especially likely to be targeted. Cutting the CAP by a fifth would be enough to

fill the Brexit gap, while even deep spending cuts in the small categories would yield

considerably less (see figure 2).

If EU Member States decide to increase contributions in order to make up for the Brexit

budget gap, existing imbalances between net contributors and net recipients will

become further entrenched. Pressure to shift spending to other areas can grow (see

figure 6).

How exactly these dynamics will impact post-2020 CAP spending is unclear at this stage. CAP

could suffer large cuts or be largely spared from the adjustment effort. Importantly, profound

changes to the CAP architecture, be it in form of co-financing or new instruments and allocation

criteria could contribute to reducing costs.

Speculation about introducing co-financing in pillar 1 direct payments has grown after

the Commission’s reflection paper on the future of the EU finance explicitly mentioned this

option35. According to AGRA Europe estimates, switching to such a system could reduce

budgetary expenditure on the CAP by between €7.5 and €13.5 billion a year, depending of the

specific design of co-financing rates. Nuñez Ferrer et al even imagine a co-financing system

that would save up to €29 billion per year36. However, so far, most Member States reject the

idea37.

33 Augère-Granier, Marie-Laure and Sgueo, Gianluca (2016), Common Agricultural Policy – Pillar II, European

Parliamentary Research Service briefing, July 2016. 34 See Henke, Roberto et.al. (2015) Jonathan Little et al (2013) and Matthews, Alan (2017). 35 European Commission (2017), Reflection paper on the future of EU public finances, COM(2017) 358 of 28 June

2017. 36 Nuñez Ferrer, Jorge et al., (2016), Study on the potential and limitations of reforming the financing of the EU

budget, Expertise commissioned by the European Commission on behalf of the High Level Group on Own

Resources, Brussels. 37 Ciaran Moran, “CAP under pressure as most Member States reject co-financing of direct payments”,

Independent.ie, 13 october 2017.


29

Regarding the timing of a major reform, it is true that historically there has been a strong link

between MFF negotiations and CAP reforms38. This link was clear between the last CAP reform

in 2013 and the negotiation of the current MFF, and it seems reasonable to expect changes in

the CAP design following the adoption of the post-2020 MFF, all the more if the latter decreases

the share of CAP spending in the EU budget.

However, it is also true that the uncertainty about the budgetary implications of Brexit and

the difficult negotiations about the Brexit bill could delay the next MFF compromise.

Furthermore, the election of a new European Parliament will interrupt the EU’s legislative

activity in 2019. Consequently, some experts consider that a major revision of CAP will not be

possible until 2022 or 2023, with implementation starting in 2024 or 202539.

3.3. Estimating the Brexit effect on the CAP: data and methodology

In order to estimate possible effect of Brexit on Member States CAP net balances,

we rely on data provided by the European Commission in its overview of ‘operating

budgetary balances (OBB)40. They record revenue as well as executed expenditure by

member state. Since revenue as well as spending has shown considerable variance in the past,

we use the 2014-16 average for our calculations.

There are no official calculations for Member States’ net balances in specific spending areas

because all EU revenue goes into a unitary budget. However, balances can be estimated by

comparing a country’s share in financing the EU budget to the share of EU funds it receives in

a specific area. Or approach can be outlined as follows:

First, we calculate each Member State’s national contribution (i.e., revenue raised via

the VAT- and the GNI-based resource, including rebates) as a share of all national

contributions. By multiplying the contribution share with EU-28 spending on CAP, we

arrive at an estimated contribution to the CAP.

Second, we subtract the funds a Member State receives via the CAP from its estimated

contribution. This gives us today’s estimated net contribution.

Estimating the impact of Brexit on CAP net balances requires a few additional steps:

We remove the UK rebate and the so-called ‘rebate on the rebate’ that mitigates the

UK rebate’s impact on the contributions of Austria, Germany, the Netherlands and

Sweden41. In order to do so, we estimate a simplified UK rebate based on CAP

expenditure, taking into account that spending in ‘new’ Member States under pillar 2

is excluded from the calculation of the UK rebate42. We then calculate how much each

Member State would have to contribute to financing the rebate under the current rules

and how the burden would be shared if a GNI key was used instead. The difference

between the two gives us the net impact of the discontinued rebates, which can be

negative or positive.

We split up the UK’s net contribution among Member States. Again, we use the GNI-

based resource because it is the EU budget’s marginal revenue source.

38 The 1999 Agenda 2000 reform was closely linked to the negotiations of the 2000-2006 MFF, just like the last CAP

reform in 2013, but this was not the case for the ‘Fischler Reform’ in 2004 and the CAP the 'Health Check' in

2009. 39 Matthews, A.(2017), The budgetary context for the CAP, blog article, CAPreform.eu, September 4 2017. 40 OBB are included as annex in EU annual Financial Reports. 41 How the corrections are calculated is described in great detail in the 2014 Own Resources Decision. 42 For the sake of simplicity, we leave out smaller items in the calculation, such as the United Kingdom’s advantage

and TOR windfall gains.


30

Finally, we sum up the original CAP contribution, the effect of discontinuing the rebates,

and the cost of covering the UK’s net contribution. The result is an updated CAP

contribution that can be subtracted from the (possibly also updated) CAP spending in

a country to arrive at a new net balance.

The approach outlined above simulates an increase in contributions that balances the

budget shortfall after Brexit. To simulate a budget cut instead, we simply lower CAP

spending by the desired amount and compare it to the sum of updated contributions.

If spending is lower than revenue, contributions are decreased according to the GNI

key until the budget is in balance once again.

3.4. Current CAP net balances

Figure 5 shows current CAP net balances. As can be noticed, the CAP has a large distributional

impact. The four largest net beneficiaries in absolute terms, namely Poland, Greece, Romania

and Spain, together receive transfers worth around €9 billion annually, which translates into

positive net balances of between €1.8 and €3.1 billion. On the other side of the spectrum,

Germany is by far the largest net contributor, followed by the UK. Their net annual contribution

to CAP amounts to €5.1 and €3 billion, respectively. Since 2014, there has been some variance

in CAP net balances but no clear trend towards convergence or divergence.

Figure 5: CAP net balances of EU Member States, 2014-2016 average

Source: Authors’ calculations, based on European Commission data.


31

3.5. Adjusting the CAP to Brexit

In analogy to the Brexit gap, it is possible to estimate the size of the budget shortfall left by

the British departure from the EU. The ‘CAP gap’ is equal to the British net contribution

in the field of CAP, worth around €3 billion annually. However, it does not follow that

Brexit will lead to a reduction of CAP spending by this amount. Expenditure could just as

well be reduced by €10 billion, or not at all. There is no automatism, the decision is up

to the EU institutions and the Member States.

Simulating the impact of different reform options on CAP net balances can give us an idea

where Member States’ material interests lie. The scenarios we outline in the following

are not reform proposals. Rather, they serve to illustrate the dynamics that follow

from the different possible changes to the CAP.

3.5.1. Scenario 1: the impact of higher contributions

If the current CAP spending levels are maintained after Brexit, additional revenue

worth €3 billion must be raised to finance them. Assuming that there is no radical change

to the EU financing system before 2020, this happens via the GNI-based own resource (see

section 1.2.3). As figure 6 shows, adjusting to the ‘CAP gap’ through higher

contributions leads to a worsening net balance in all Member States. However, not

all are equally affected. Austria, Germany, The Netherlands and Sweden lose their benefits

from the ‘rebate on the rebate’ (ibid.). Consequently, in this scenario, a country like The

Netherlands sees its CAP net balance deteriorate by almost the same absolute amount as

Italy, a country whose GNI is three times larger. Whether this represents an unfair additional

burden for the former rebate countries or whether today’s financing system is unfair to most

Member States, is up for debate.

More generally, higher contributions magnify the already existing imbalance between

CAP net contributors and net recipients. We estimate that Germany’s CAP net balance

deteriorates to -€6.1 billion in this scenario and even France ends up with a €1.2 billion CAP

net deficit. At the same time, the Polish CAP net balance remains almost unchanged at €3

billion. Nevertheless, it is worth noting that the amounts involved represent relatively small

shares of government expenditure. Even for the former rebate countries, the change in net

balances is limited to around 0.1% of general government spending.


32

Figure 6: Estimated change in CAP net balances resulting from a €3 billion increase

in national contributions

Source: Authors’ calculations, based on Eurostat and European Commission data.

3.5.2. Scenario 2: the impact of CAP spending cuts

Reducing spending puts a higher burden of adjustment on net CAP recipients. A €3 billion

cut, equivalent to the British CAP net contribution, reduces the Polish and Greek net

gains from the CAP by €230 million and €140 million respectively. Some net

contributors, like Luxembourg and Belgium, see their CAP net balance improve very

slightly, but most are still negatively affected (see figure 7).

The mixed result reflects two conflicting effects of Brexit. On the one hand, the EU’s CAP

expenditure is reduced in all Member States. The higher the amount a country receives at the

moment, the larger the negative effect. On the other hand, money is redistributed from former

rebate countries to all other Member States (see previous section). For example, German CAP

net contributions increase by more than €600 million. In absolute terms, this is especially

beneficial for countries that used to finance the bulk of the UK rebate, such as France and

Italy. In some cases, the reduced CAP contribution more than makes up for the loss in EU

funding.

If the entire Brexit gap of €10 billion is financed by cutting CAP expenditure, the

roles are almost completely reversed compared to the “higher contributions”

scenario (see figure 8). Large net contributors to the CAP benefit from the reform.

For most former rebate countries, the savings from reduced contributions outweigh the loss

of EU funds. In contrast, most net recipients pay only slightly less than before, but receive

substantially reduced payments. The Polish CAP net balance deteriorates by a fifth, or €680

million. Furthermore, some of the poorest Member States are strongly affected by cuts. For

example, in Bulgaria, Lithuania and Romania, the negative impact exceeds 0.7% of

government spending.


33

Figure 7: Estimated change in CAP net balances resulting from a €3 billion CAP

spending cut


Figure 8: Estimated change in CAP net balances resulting from a €10 billion CAP

spending cut



34

3.5.3. The impact of co-financing and re-balancing the two pillars of the CAP

The decision to cut or to maintain overall CAP expenditure has important distributional

consequences. They can be modified via changes within the CAP. Changing eligibility criteria

or protecting certain elements from cuts can mitigate or exacerbate the consequences of

spending cuts.

One proposal that has much appeal among experts and researchers is to introduce

national co-financing for pillar 1 spending. This is seen as a good measure not only to

reduce overall CAP spending, but to give Member States a greater incentive to improve the

fairness and cost-effectiveness of direct payments43.

Figure 9 shows the estimated impact of a €10 billion spending cut achieved through

the introduction of co-financing rates for direct payments. The results are compared to

the ‘reference’ scenario where the same cut is distributed between pillar 1 and 2. As can be

noticed, there is no clear net recipient/net contributor divide. Several net recipients (e.g.

Poland, Romania) and some net contributors (e.g. Austria, the Netherlands) are less affected

than in the reference scenario. The main losers in this scenario are those countries which are

especially dependent on pillar 1 payments (France, Spain). In contrast, countries such as

Portugal, Romania or Austria, where pillar 2 represents more than 40% of total CAP allocation

(see figure 4) benefit particularly from concentrating cuts on pillar 1.

Figure 9: Estimated change in CAP net balances resulting from a €10 billion

reduction in CAP pillar 1 spending


More sophisticated adjustments could make large reductions in overall CAP expenditure

compatible with protecting economically weaker Member States. One option would be to

introduce a cohesion-based system of direct payments, with different co-financing rates for

applied to Member States according to their levels of per capita GDP44. A more radical option

would be the introduction of co-financing for direct payments only in the old Member States

(EU-15), as suggested in a recent Agra article45. In order to make up for the €10 billion Brexit

gap, the EU-15 would have to finance one third of the direct payments out of their own budget.

Figure 10 compares the estimated effect of this measure to the reference scenario. The main

43 Matthews, Allan (2016); von Cramon-Taubadel, Stephan et. al (2017). 44 Nuñez Ferrer, Jorge et al. (2016), op.cit 45 Horseman , Chris, “Analysis: P1 co-financing could save CAP up to €13.5 billion per year”, Agra Europe, 29 June

2017.


35

losers in this scenario are big EU-15 CAP gross recipients, particularly Spain, France and

Germany but also Greece and Ireland. The main beneficiaries are Poland, Romania and the

Czech Republic, which see their net balances improve rather than worsen.

Figure 10: Estimated change in CAP net balances resulting from a €10 billion

reduction in CAP pillar 1 spending (only old Member States)



36


37

4. CONCLUSIONS AND RECOMMENDATIONS

Brexit has far-reaching consequences for the EU’s finances. The departure of the UK may alter

the dynamics of budgetary negotiations in the European Council. The end of the UK rebate

can also open the door to a more profound reform of the system of Own Resources. The most

immediate consequences, however, are those related to the impact of the ongoing

‘Brexit bill’ negotiations on the current MFF and the expected permanent shortfall

that the UK will leave in the EU budget at the moment of withdrawal.

How exactly these two factors will affect the current and future MFF – and by

extension current and future CAP spending – depends to large extent on politics. We

do not know what the final outcome of the Brexit bill negotiations will be, but it seems clear

that they will depend as much on legal as on political arguments. Likewise, Member States

and the European Parliament can take different decisions on how to adjust the EU budget to

the Brexit gap. Depending on the decisions taken, Brexit can offer an opportunity to reform

the spending and the revenue side of the EU’s finances or, on the contrary, entrench and

deepen existing divides between Member States and further complicate the EU budget with

the establishment of additional corrections.

In this note, we have summarised the possible financial consequences of Brexit for the EU

budget and CAP in particular.

The size and nature of the ‘Brexit bill’ determines whether there will be a gap in

the EU’s finances before the end of the current MFF and whether the negotiations about

the next MFF will be complicated by an unexpectedly large amount of RAL.

The loss of the British net contribution to the EU budget leaves a yearly gap that

must be filled by cutting expenditure, increasing contributions or finding new revenue

sources. We assume that by 2020, no new revenue will come from the introduction of

additional own resources or a Single Market membership fee. Consequently, we

estimate an overall ‘Brexit gap’ of €10 billion and a ‘CAP gap’ of €3 billion.

We have outlined two scenarios to adjust to Brexit at the level of the overall EU budget. Both

suggest that CAP spending will be affected.

Scenario 1: Filling the Brexit gap by increasing Member States’ national

contributions. This especially affects countries that already have a large negative net

balance. Some of them, including Germany and The Netherlands, are hit by further

contribution increases because rebates related to the British EU membership run out.

Consequently, they are likely to push for a restructuring of EU spending.

Scenario 2: Reducing expenditure. The precise consequences of this option depend

on the distribution of the budget cuts, but €10 billion in savings cannot be achieved by

reducing spending on small EU programmes. Attention is therefore likely to turn to the

Structural and Investment Funds and the CAP.

Furthermore, we have estimated what impact the different options to adjust CAP to Brexit

might have on Member States’ CAP net balances.

If the current CAP spending levels are to be maintained after Brexit, an

increase of GNI-based contributions worth €3 billion (the equivalent to the

British net contribution in the field of CAP) is needed to finance them. This leads

to a deterioration of CAP net balances in all Member States, and widens the already

existing imbalance between CAP net contributors and net recipients.


38

Reducing the CAP budget by €3 billion has moderate consequences for

Member States’ CAP net balances. However, it seems likely that there will be

pressure for deeper cuts if other EU programmes are protected.

Adjusting to the Brexit gap only through CAP spending cuts (that is, cutting CAP

by €10 billion) benefits CAP net contributors and shifts the burden of

adjustment to net recipients. As a result, CAP imbalances shrink, but the cuts are

significant, especially for some of the poorer Member States.

Concentrating spending cuts on pillar 1 while protecting pillar 2 has been

suggested as a way of reducing the costs of the CAP and improving the quality of CAP

spending. Our estimates suggest that such a strategy spreads the burden of

adjustment between net contributors and net recipients. However, it requires some

large gross recipients of CAP funds (particularly France and Spain) to accept

a sizable deterioration in their net balances.

Our research shows that there is no pain-free path to adjustment. However, it also shows that

the financial impact of the different reform options is in most cases limited when

compared to general government spending. The challenge for governments mainly

consists in communicating to their constituents that a slightly higher net contribution or a

lower net benefit helps make the EU budget more efficient and ultimately benefits all EU

members. Their case might be more convincing if they simultaneously simplify the EU’s

revenue system and refocus spending instead of devoting energy on creating new rebate

mechanisms.

On a more general note, the following recommendations could contribute to mitigating the

impact of Brexit on the EU budget and on the CAP:

The EU should be careful in linking the agreement on the Brexit bill to an

agreement on a future and hypothetical transitional period, as proposed by the

UK. Moving to the second phase without any clear agreement on the Brexit bill can

offer to the UK the opportunity to use money as a bargaining chip when negotiating

the transition to and future EU/UK relation.

The EU’s priority in the Brexit bill negotiations should be to minimise the

adverse financial impact of Brexit in current and future MFF. If concessions are

needed, they can come from other elements of the deal such as the UK’s participation

in EU bodies and funds, payment for pensions and other employees’ benefits or

payment for contingent liabilities.

Bargaining about budget cuts and contribution increases should not be

limited to one spending area, but include the entire system of EU finances. For

example, net contributors might be more willing to accept further increases in their

payments if the overall budget was reformed.

It is important to start debating contested key concepts (like ‘EU added

value’) and potential compromises soon, even if the actual budgetary impact of

Brexit could become clear only at a very late stage of the Brexit negotiations. If the

preparations for the post-2020 MFF start only in March 2018, there might not be

enough time for an ambitious reform and the EU might end up with a system that is

barely less complicated than the current one. A unique opportunity to improve the EU’s

public finances would be wasted.

Brexit can provide the narrative for a profound reform in the architecture of

CAP, aimed not only at reducing overall CAP spending but at rendering CAP more

effective and sustainable. However, a major revision of CAP seems unlikely before

2022 or 2023, with implementation starting in 2024 or 2025.


39

REFERENCES

Augère-Granier, Marie-Laure and Sgueo, Gianluca (2016), Common Agricultural Policy

– Pillar II, European Parliamentary Research Service briefing

Barker, Alex (2017), The €60 billion Brexit bill: How to disentangle Britain from the EU

budget, Centre for European Reform, February 2017

Buckwell, A. et al (2017), CAP: Thinking Out of the box: Further modernisation of the

CAP – why, what and how? The RISE Foundation, Brussels

Chomicz, Ewa (2017), EU budget post-Brexit: Confronting reality, exploring viable

solutions, European Policy Centre, Discussion Paper

D’Alfonso, Alessandro (2016), The UK 'rebate' on the EU budget. An explanation of the

abatement and other correction mechanisms, European Parliamentary Research

Service Briefing, February 2016

Darvas, Zsolt et al (2017) Divorce settlement or leaving the club? A breakdown of the

Brexit Bill, Bruegel Working Paper, Issue 03

European Commission (2014), EU Public Finances, 5th edition, Brussels

European Commission (2015), EU budget 2014 Financial Report, Luxembourg

European Commission (2016), Commission Staff Working Document accompanying the

communication from the Commission on the mid-term review/revision of the

Multiannual Financial Framework 2014-2020, 299 final, Brussels

European Commission (2016), EU budget 2015 Financial Report, Luxembourg

European Commission (2017), 10th Financial Report from the Commission to the

European Parliament and the Council on the European Agricultural Guarantee Fund

2016 Financial Year, COM(2017) 456 final, Brussels

European Commission (2017), 10th Financial Report from the Commission to the

European Parliament and the Council on the European Agricultural Fund for

Development 2016 Financial Year, COM(2017) 554 final, Brussels

European Commission (2017), Reflection paper on the future of EU public finances,

COM(2017) 358 of 28 June 2017

European Commission Task Force for the preparation and conduct of the negotiations

with the United Kingdom under Article 50 EU, (2017) Position Paper “Essential

Principles on Financial Settlement¨, TF50 (2017), 2/2

European Commission, DG budget (2017), Report on budgetary and financial

management, financial year 2016, Brussels

Haas, J. and Rubio, E. (2017), Brexit and the EU budget: Threat or Opportunity,

Jacques Delors Institute, Policy Paper 183


40

Henke, Roberto et. al. (2015), Implementation of the first pillar of the CAP 2014-2020

in the EU Member States, study requested by the European Parliament's Committee on

Agriculture and Rural Development

Keep, Matthew (2017), Brexit: the exit bill, House of Commons Library Briefing Paper

No. 8039.

Keep, Matthew (2017), The UK’s contribution to the EU budget, House of Commons

Library Briefing Paper No. CBP 7886

Little, Jonathan et al (2013), European Council Conclusions on the Multi-Annual

Financial Framework and the CAP, note from the European Parliament, July 2013

Matthews, Alan (2014), The impact of the simultaneous MFF negotiations on the

European Parliament’s influence on the 2013 CAP reform, European Parliament project

“The First Cap Reform Under The Ordinary Legislative Procedure: A Political Economy

Perspective”, Brussels

Matthews, Alan (2016), The Future of Direct Payments, Paper Prepared for Workshop

on ‘Reflections on the Agricultural Challenges Post 2020 in the EU: Preparing the next

CAP Reform’. Brussels: European Parliament, Directorate General for Internal Policies

Matthews, Alan (2017), The budgetary context for the CAP, blog article, CAPreform.eu

Monti, Mario et al (2016), Future financing of the EU. Final report and recommendations

of the high level group on own resources, Brussels, December 2016

Núñez Ferrer, Jorge and Rinaldi, David (2016), The Impact of Brexit on the EU Budget:

A non-catastrophic even, CEPS Policy Brief No. 347

Núñez Ferrer, Jorge and Rinaldi, David (2016), The Impact of Brexit on the EU Budget:

A non-catastrophic even, CEPS Policy Brief No. 347

Roberto Henke et. al. (2015), Implementation of the first pillar of the CAP 2014-2020

in the EU Member States, study requested by the European Parliament's Committee on

Agriculture and Rural Development

Von Cramon-Taubadel, S., and Heinemann, F. (2017), The EU’s Common Agricultural

Policy. Why reform is overdue, Bertelsmann Stiftung, Policy Brief





EU - UK agricultural trade: state of play

and possible impacts of Brexit

STUDY

Abstract

This report analyzes current UK-EU27 agri-food trade, and quantifies the

impacts of a return to WTO rules after Brexit. Agri-food trade is likely to

decrease steeply, especially for meat and dairy sectors. However, there

might be an opportunity for an increase in production in a reduced number

of European sectors, such as red meat, cattle or wheat, to replace imports

from the UK. More generally, Ireland is likely to be the most negatively

impacted country and deserves particular attention during the Brexit

process.

IP/B/AGRI/IC/2017-087 October 2017

PE 602.008 EN


Rural Development.

AUTHORS

Centre d’Études Prospectives et d’Informations Internationales (CEPII): Cecilia BELLORA,

Charlotte EMLINGER, Jean FOURÉ, Houssein GUIMBARD




LINGUISTIC VERSIONS

Original: EN

ABOUT THE PUBLISHER





Additional materials are available on the website of the CEPII:

http://www.cepii.fr/IPOL_STU_2017_602008_EN


Bellora, C., Emlinger, C., Fouré, J. And Guimbard, H. (2017), Research for AGRI Committee,

EU – UK agricultural trade: state of play and possible impacts of Brexit, European Parliament,

Policy Department for Structural and Cohesion Policies, Brussels


Bellora et al. (2017)

DISCLAIMER






http://www.cepii.fr/IPOL_STU_2017_602008_EN

EU - UK agricultural trade: state of play and possible impacts of Brexit

43

BRIEF PROFESSIONAL DESCRIPTION

The authors of this document are economists at the CEPII (Centre d’Études

Prospectives et Informations Internationales, a French research center on

international economics).

Cecilia BELLORA currently works on international trade policies and on the

links between international trade and the environment. She holds a PhD

in economics (University of Cergy-Pontoise, France). She previously

worked for a think-tank in the field of agricultural development and then

at the French National Institute for Agronomic Research (INRA).

Charlotte EMLINGER is working on trade analysis with a special focus on

agricultural trade and policies. Her main research topics concern quality

specialization, the role of intermediaries in trade, and the impact of trade

agreements. She's also in charge of the CEPII trade database. She holds

a PhD in economics on Montpellier SupAgro-University of Montpellier 1

(France).

Jean FOURÉ works on the computable general equilibrium (CGE) model

MIRAGE (trade and environment policy analysis) and develops the long-

term growth model MaGE (EconMap database). Jean Fouré graduated from

the École Polytechnique and the École Nationale de Statistique et de

l'Administration Économique (ENSAE) in 2010.

Houssein GUIMBARD holds an MPhil in environmental economics and

natural resources (AgroParisTech, Paris, France). He works on CGE models

and their application to international trade. His fields of interest are

regionalism and trade policies.


44


45

CONTENTS


LIST OF TABLES 49

LIST OF FIGURES 50


INTRODUCTION 53

1. IMPACT ASSESSMENTS OF EXIT FROM EUROPE 55

2. EUROPEAN UNION AND UNITED KINGDOM BILATERAL TRADE:

STATISTICAL OVERVIEW 57

2.1. Macro-economic indicators: a marked dissymmetry 57

2.2. Trade protection 58

2.2.1. Tariffs: increase to their MFN level 58

2.2.2. Non-tariff measures (NTMs): increase in their trade-restrictiveness 58

2.3. Trade flows 59

2.3.1. Main trading sectors potentially impacted: processed food, dairy and

meat. 60

2.3.2. Main European trading countries: France, Netherlands and the

particular case of Ireland 63

2.3.3. High integration of agri-food value chains through trade 65

3. MODEL AND SCENARIOS 69

3.1. Modelling framework 69

3.2. Scenarios 69

3.2.1. The WTO scenario 69

3.2.2. Alternative specifications and sensitivity analysis 70

4. IMPACTS OF A WTO SCENARIO ON THE AGRI-FOOD SECTOR IN

THE EUROPEAN UNION 71

4.1. A large decrease in EU27-UK agri-food trade flows unevenly distributed

across sectors and EU27 countries 71

4.1.1. Strong decrease in EU27 exports to UK, compensated by exports to

other countries only in a few sectors 71

4.1.2. EU27 agri-food imports from the UK: same mechanisms as for

imports 73

4.1.3. Most impacted EU27 exporters: the Netherlands, France and Ireland 74

4.2. Agri-food value-added decreases within the EU27, though exposure of

countries is heterogeneous 75

4.2.1. Agri-food value-added in the EU27: large negative impact in Ireland,

very limited in other EU27 countries 76

4.2.2. Decomposition of the impacts on value-added in the EU27: losses

from the Brexit are only partly compensated by exports to other

countries 77


46

4.3. At the macroeconomic level, the impact on EU27 countries is marginal,

except for Ireland 79

5. CONCLUDING REMARKS 81

REFERENCES 83

ANNEX A: DATA 87

ANNEX B: MODEL DESCRIPTION 89

ANNEX C: ADDITIONAL TABLES 95

ANNEX D: ADDITIONAL TABLES – HS6 DETAILS 101


47


AVE Ad Valorem Equivalent

BAU Business-as-usual, the reference scenario without trade policy

shock

CAP Common Agricultural Policy

CES Constant Elasticity of Substitution

EU European Union

EU27 European Union, with 27 Member States

(Austria, Belgium, Bulgaria, Coratia, Cyprus, Czech Republic, Denmark,

Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia,

Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania,

Slovakia, Slovenia, Spain, Sweden)

GDP Gross Domestic Product

GTAP Global Trade Analysis Project

HS6 United Nations’ Harmonized System 6-digits classification

MAcMap-HS6 Market Access Map HS6 database

MIRAGE Modelling International Relationships in Applied General

Equilibrium

NEC Not Elsewhere Classified

NES Not Elsewhere Specified

NTM Non-tariff measure

SAM Social Accounting Matrix

UK United Kingdom

WTO World Trade Organization


48


49

LIST OF TABLES

TABLE 1

Market size, EU27 (and its first ten Member States, by GDP value) and UK (2016) 58

TABLE 2

Trade flows and protection, EU27 – UK 59

TABLE 3

Main export destinations, of the EU27 and the UK, total trade 60

TABLE 4

EU27 exports to the UK in agri-food sectors and faced protection 62

TABLE 5

EU27 imports from the UK in agri-food sectors and faced protection 63

TABLE 6

EU27 exports to the UK in agri-food sectors and faced protection, by country (top ten,

by protection revenue) 64

TABLE 7

EU27 imports from the UK in agri-food sectors and faced protection, by country (top

ten, by protection revenue) 65

TABLE 8

UK value-added in EU27 exports (% of gross export of EU27 countries) 66

TABLE 9

Breakdown of the value-added contained in exports of UK, by origin 67

TABLE 10

Variations in consumption and production price indexes for agri-food goods and all

goods in the WTO scenario, 2030 79

TABLE B. 1

Aggregation of regions 90

TABLE B. 2

Aggregation of sectors 92

TABLE B. 3

Reduction in intra-EU trade restrictiveness of NTMs 93

TABLE C. 1

EU sector exports by destination and ranked by largest decrease in exports towards

the world, WTO scenario, 2030 95

TABLE C. 2

EU subregions export to UK in Agri-food sectors: aggregate and three sectors with

the largest variations, 2030 96

TABLE C. 3

Agri-food value-added in EU regions, in the WTO scenario: aggregate, five most

impacted sectors and decomposition of variation, 2030 98

TABLE C. 4

Gross Domestic Product (volume) and variation in 2030 100


50

TABLE D.1

Number of HS6 products, by GTAP sector 101

TABLE D.2

EU27 imports, HS6 level (1/2) 102

TABLE D.3

EU27 imports, HS6 level (2/2) 103

TABLE D.4

EU27 exports, HS6 level (1/2) 104

TABLE D.5

EU27 exports, HS6 level (2/2) 105

LIST OF FIGURES

FIGURE 1

Variations in EU27 export volume to the UK, by sector, 2030 72

FIGURE 2

Variations in aggregate EU27 imports volume from the UK, by sector, 2030 74

FIGURE 3

Variations in EU27 agri-food exports to the UK, by country, 2030 75

FIGURE 4

Variations in total agri-food value-added by EU27 country and UK, 2030 77

FIGURE 5

Variations in agri-food value-added volume and decomposition by source in the WTO

scenario, 2030 78


51

EXECUTIVE SUMMARY

This document first presents the current state of the trade relationship between the European

Union (EU27) and the United Kingdom (UK). It then produces a quantitative impact

assessment of the UK’s withdrawal from the EU27, with a specific focus on agri-food sectors.

The main scenario assumes that (i) MFN tariffs will be imposed on bilateral trade in goods

between the EU27 and the UK and (ii) the trade-restrictiveness of non-tariff measures will

increase. In the absence of a consensual scenario regarding public policies other than those

concerning the trade policy mentioned above, the status quo is assumed. In other terms,

redistributive policies that could mitigate Brexit’s negative impacts are not contemplated in

our scenarios and no change in the Common Agricultural Policy is assumed. Results are given

by the computable general equilibrium model developed by the CEPII, MIRAGE, and are

expressed as a deviation from a baseline, in 2030.

The key-findings are the following:

The relationship between the UK and the EU27 is characterized by a marked

dissymmetry. The EU27, as a whole, is a large market (more than 445 million

inhabitants and a GDP of USD 13.8 thousand billion in 2016), while the UK is relatively

smaller (a population of 65.6 million people and a GDP of USD 2.6 thousand billion).

Thus, the EU27 represents a large market and outlet for UK exporters, while the UK is,

in comparison, a small market for EU27 (even if it represents the main export

destination of some agri-food sectors in given EU27 countries). For these reasons,

macroeconomic impacts on the UK are significantly larger (e.g. -2.3% in GDP) than for

EU27 (-0.3%). Nevertheless, the UK is currently the second largest EU28 country and

is highly integrated with the EU27 in terms of trade and value chains. As a result, all

the EU27 countries will be negatively affected by Brexit, the magnitude of the impact

increasing with economic proximity to the UK. Ireland in particular (-3.4% in GDP, USD

-63.4 billion), and to a much lesser extent Belgium and Luxembourg (-0.7%) and the

Netherlands (-0.5%), are the most affected countries.

Agri-food products are less traded than manufactured ones and contribute less in total

GDP. They will face however the largest increases in trade protection, both in terms of

tariffs and non-tariff measures. Agri-food exports of the EU27 to the UK will decrease

by USD 34 billion (62%) and imports by USD 19 billion (with the same relative

decrease, 62%).

Trade diversion will take place; part of the decrease in exports to the UK will be

compensated by an increase in intra-EU27 trade (+1%) as well as in exports to third

countries (+0.9%). This is partly explained by a loss of UK’s competitiveness, due to

higher prices of imported intermediary consumptions. In the end, agri-food exports of

the EU27 to the world will decrease by 4.1% (USD -27 billion). The most affected

sectors (in value terms) are processed food (USD -10.5 billion, -4.7%),46 which is also

the most exported (33% of EU27 agri-food exports), white meat (USD -5.2 billion, -

10.5%) and dairy (USD -4.6 billion, -7%). The Netherlands (USD -6.7 billion, -66%),

Ireland (USD -6.5 billion, -71%) and France (USD -4.7 billion, -51%) undergo the

largest drops in exports.

Agri-food production and value added are also affected by trade with other countries

as well as domestic demand. The relative magnitude of each of these effects (bilateral

trade with the UK, trade with third countries and domestic demand) varies across

countries and sectors and determines Brexit’s impact heterogeneity. In the UK, agri-

food value-added increases (+2%), mainly because local production partially

46 These numbers correspond to the impacts on the most affected sector producing processed food, identified as

“Other food” in the simulation results.


52

substitutes imports from the EU27. This takes place at consumers expense since

consumption prices increase by 4%. In the EU27 as a whole, agri-food value-added

decreases by 0.8%; the increase in exports to third countries and in intra-EU trade do

not compensate for the loss of exports to UK. Even if in all EU27 countries, overall agri-

food value-added decreases, some sectors like Red meat (+2.1%) and Cattle (+1.3%)

in France gain thanks to their capacity to fulfill the domestic demand, replacing imports

from the UK. The wheat sector in France is one of the few where value added increases

(+1.7%) thanks to an increase in exports to other EU countries. The fall in agri-food

value-added is particularly large in Ireland (-16%, with a collapse in white meat, -

58%), because of the decrease in exports to UK but also to general equilibrium effects

leading to a strong decrease in domestic demand.

Because of its tight relationship with the UK, of all EU27 countries, Ireland is affected

the most by Brexit, and not only in agri-food sectors. In relative terms, its GDP

decreases even more than UK's GDP (-3.4% vs -2.4%). This is explained by a drop in

Irish agri-food exports to the UK and to the rest of the World, including EU27 countries

as Irish production relies heavily on imported intermediates from the UK.


53

INTRODUCTION

In March 2017, the United Kingdom (UK) Government notified the European Council of its

intention to withdraw from the European Union (EU). Negotiations on the modalities of Brexit

have started and should not exceed two years, after which the withdrawal should be effective,

as stipulated by the Treaty on European Union.

Agri-food sectors do not contribute much to national GDPs or bilateral trade flows (11% of

EU27 exports to the UK in value), but the stakes are nevertheless high. The UK is an important

destination for EU27 exports with a highly favorable agricultural trade balance with the UK

(USD 29 billion).47 Trade protection that could apply on agri-food goods in the absence of a

free trade agreement is particularly high (64%, to be compared with 26% before Brexit, taking

into accounts both tariffs and NTMs). Furthermore, agricultural production is managed at the

European level by the Common Agricultural Policy, which benefits from one of the largest

European budgets (€ 59 billion per year). This common policy relies partly on UK contributions

and constitutes a significant support to farmers’ revenues. In other words, agriculture and the

food industry are an offensive interest for EU27 and an important subject for the UK, which

depends on imports from the EU27. The UK negotiating position will therefore depend on the

weight it will give to farmers or consumers’ interests (Grant et al., 2015; Lang, 2016; Potton

and Webb, 2017).

For the time being, the specific modalities of the post-Brexit EU27-UK relationship are

unknown. The future of agricultural policies in the UK is naturally one of the main uncertainties.

In terms of agri-food trade, which is our main focus, the issues are manifold. We briefly

summarize below the main ones:

Tariffs: Tariffs between the EU27 and the UK have to be determined during Brexit

negotiations. The future of preferential access to third markets is also uncertain for the

UK. Molinuevo (2017) suggests that trade agreements signed by the EU that concern

only goods will not be binding anymore for the UK. This implies that the UK will have

to negotiate its own preferential tariffs. Among these agreements, the EU- Turkey is

the most important. The situation of other (mixed) trade agreements signed by the EU

is more complex and uncertain. The UK could also negotiate trade agreements with

new partners, the United States, for instance. These negotiations could have an impact

on EU27 exports to the UK and to third countries, due to trade diversion effects.

Tariff Rate Quotas (TRQs): What will happen to European TRQs after Brexit is crucial

in relation to agricultural products. The EU27 and the UK have already agreed to divide

existing (import) commitments within the WTO based on historical trade flows, since

TRQs were negotiated by the European Commission on behalf of all EU member states.

The agreement is however likely to be challenged by EU and UK partners. The

uncertainty concerns also EU preferential (export) TRQs in third countries that are part

of preferential agreements. Since TRQs are not currently allocated by member states

(they are allocated on a first-come, first-served basis), the partition of the quotas could

be particularly complex (Revells, 2017; Downes, 2017). The size of these TRQs is a

major concern both for UK and EU27 farmers, especially in the livestock sector.

Non Tariff Measures (NTMs): Currently, the trade restrictiveness of NTMs (e.g.

sanitary and phytosanitary standards, technical barriers, certification procedures, etc.)

within the EU is fairly limited, since many of these measures are common to all member

states. After Brexit, any new NTM adopted without coordination between the EU27 and

the UK will probably have a negative impact on bilateral trade. Furthermore, UK’s exit

from the EU will involve more border and custom controls, increasing in consequence

prices of EU exports to the UK and of EU imports from the UK.

47 Average year value over the period 2013 – 2015.


54

Geographical Indications (GIs): In some sectors (in particular animal productions,

wine and spirits, and fruit and vegetables), maintaining protection for food names is

an important stake. Exit from the EU could potentially result in loss of protection for

food names (or GIs) in the UK, the European48 and third countries’ markets that

recognize GIs (Roussel and Doherty, 2016). The UK will need to establish its own

national approval scheme in order to protect these GIs.

In addition to these elements that both the EU27 and the UK will have to manage, issues on

rules of origin (RoO) and bargaining power after Brexit will also influence the UK negotiating

position:

The question of bargaining power is posed both when we consider UK access to EU27

and third countries markets. The UK will not be involved anymore in the negotiations

over the definition of new European norms and regulations. However, to lower the

trade restrictiveness of future European NTMs, the UK could decide to continue

following European standards, loosing part of the benefits of its independence. The UK,

a relatively small country, would also lose bargaining power in trade negotiations with

third countries, which could potentially take a long time.

Rules of Origin: The rules of origin determine where (in which country) a product and

its components have to be produced to benefit from preferential tariffs. Even if the

EU27 and the UK reach a trade agreement, many products the UK exports to EU27

would not be eligible anymore to preferential access (if value chains remain

unchanged), not enough value added being produced in the UK. More generally,

compliance with European RoO requirements potentially could entail additional

administrative costs for exporting to the EU in general, and particularly in the case of

agri-food sectors, which are closely integrated in EU supply chains (Baker and Swales

, 2016; UK House of Lords, 2016). The same problem could arise for the EU27, but

most likely to a lesser extent.

Future negotiations between the EU27 and the UK encompass several different aspects, not

exclusively trade related. In order to evaluate possible outcomes, the European Parliament

Committee on Agriculture and Rural Development commissioned to the CEPII/CIREM an

analysis of the current state of UK - EU27 agri-food trade and the possible impacts of Brexit.

Given the high uncertainty on the outcome of trade negotiations, the application of Most

Favoured Nation (MFN) tariffs to bilateral trade between the UK and the EU27, as well as an

increase in the trade restrictiveness of bilateral NTMs is the scenario retained to evaluate

Brexit's impacts. Considering that a sector-by-sector negotiation is excluded, the impact

assessment is conducted with a computable general equilibrium model, that accounts for direct

trade impacts of the increased trade protection (not only on agri-food sectors but on all goods

and services). The model also takes into consideration indirect trade impacts, due, for

instance, to trade diversion brought about by changes in relative prices, and for general

equilibrium effects triggered by changes in total revenues at the global level.

In the following, we first depict the current state of agri-food trade between the UK and the

EU27, relative to trade in manufactured goods and to total European trade. Differences across

European member states and sectors are stressed. Then, the impacts on trade and value-

added of a scenario in which no trade deal would be reached by the EU27 and the UK are

simulated and analyzed, as well as its macroeconomic consequences, taking into account the

limitations of the model and the scenario adopted. Finally, a number of policy

recommendations are drawn.

48 Products of UK presently enjoying protection in the UE27 include Melton Mowbray pork pies, Cornish pasties,

Yorkshire Wensleydale cheese, Welsh beef, Welsh lamb, Armagh bramley apples and Scotch whisky.


55

1. IMPACT ASSESSMENTS OF EXIT FROM EUROPE

Several studies were conducted before and after the referendum, to evaluate the potential

economic impact of Brexit. Ex ante analyses include both academic and non-academic works,

and use different approaches. Ottaviano et al. (2014) and Aichele and Felbermayr (2015) use

standard quantitative static general equilibrium trade models à la Arkolakis, Costinot and

Rodriguez-Clare (2012) based on a gravity model, to estimate the effect on the UK economy

of leaving the EU. Ebell et al. (2016) evaluate the long-run macroeconomic impact of Brexit

by employing a large scale structural global econometric model (NiGEM), while Brakman et al.

(2017), HM Treasury (2016) and Connell et al. (2017) use gravity models to assess the effects

on trade of Brexit. Computable general equilibrium models are the most commonly approaches

used to predict the effect of Brexit on trade, value added and real income (see, e.g., Booth et

al., 2015; Ciuriak et al., 2015; PwC, 2016; Rojas-Romagosa, 2016; Boulanger and Philippidis,

2015), while Davies and Studnicka (2017) and Hosoe (2016) discuss the potential impact of

Brexit, employing general equilibrium models accounting for firm heterogeneity à la Melitz

(2013).

These works vary in their methodological approaches and in terms of scenarios and focus,

which makes it difficult to compare their output. Almost all these studies evaluate and compare

the impacts of a “hard” and a “soft” Brexit (corresponding to a WTO scenario, and a UK-EU

FTA in various balances); some focus on the impact of non-tariff measures and dynamic effects

(Aichele and Felbermayr, 2015), others focus more on the post-Brexit trade policy that the UK

should adopt (Ciuriak et al., 2015), or the role of global value chains (Connell et al., 2017).49

It is important to note that overall, in the available studies, the main focus is the impact of

Brexit on the UK economy, with little attention paid to the effects on EU members. The

exceptions are Bergin et al. (2016), Barett et al. (2015) and Rojas-Romagosa (2016) which

analyze the impact of Brexit on the Netherlands and Ireland. Lawless and Morgenroth (2016)

compare trade and tariffs data to discuss the effect of Brexit on EU trade, and using sector

level elasticity estimates they compute the tariff-induced price increases and trade reductions

that might result from Brexit.

In almost all these works, Brexit is shown to have substantial negative impacts, for both the

UK and the EU. The impact on British GDP ranges from -7% to -0.1%, depending on the

assumptions made and the scenarios considered (see Bush and Matthes, 2016, for a review

and a meta-analysis of the macroeconomic impacts of Brexit). All of these studies find that

the most negative outcome would result from failure of the UK and the EU27 to negotiate the

terms of the UK’s exit, i.e., if they are unable to strike a trade agreement and apply WTO

tariffs to their bilateral trade.

Studies focusing on the agricultural sector are relatively scarce, and essentially, evaluate the

impact of Brexit on British agriculture, using descriptive evidence on trade, production and

tariffs (Buckwell, 2016; Potton, 2017; Grant et al., 2015; Lang, 2015), or partial equilibrium

modeling frameworks as in Davis et al. (2017) and Van Berkum et al. (2016). Davis et al.

(2017) illustrate the heterogeneous impacts that Brexit could have on the UK’s agricultural

sectors. They combine two partial equilibrium models, FAPRI-UK and FAPRI-EU, to examine

different trade arrangements and show that imposing WTO tariffs on UK–EU bilateral trade

would have a significant impact on the UK domestic market, with the magnitude of this impact

across sectors depending on the trade balance in each sector. Imposing tariffs on those

products that are mostly imported, e.g. dairy, pig and poultry products, by reducing import

volumes, would have a positive impact on UK domestic prices, and a resulting positive effect

49 Connell et al. (2017) show that including sector-level input-output linkages in production using WIOD data in

gravity estimates increases the losses to the UK induced by Brexit.


56

on production. Van Berkum et al. (2016), in their study, focus more on the public policies that

the UK might adopt to cope with Brexit. Using the AGMEMOD partial equilibrium model, they

conduct a sector analysis and assess the impacts on trade and farm incomes according to

different UK agricultural policy scenarios. Donnellan and Hanrahan (2016) use the FAPRI-

Ireland model to evaluate the potential impact of Brexit. Although their main focus is Ireland,

they find notable negative impacts for the EU agri-food sector overall, and in some sectors

and member states in particular (beef, dairy and lamb for Ireland, pig and dairy for Denmark,

vegetables for the Netherlands and wine for France, Spain and Italy). Baker et al. (2017) also

use partial equilibrium model to assess the impact of Brexit on farmers’ income. They show

that farm business income benefits from the Brexit, through higher prices, in the dairy and

pig sector. On the other hand, producers of cereals and sheep meat will experience income

reduction due to rising costs of trade to export to the EU. This result is consistent with, Freund

et al. (2017) who show with the MAGNET CGE model that the impacts of Brexit is negative for

UK, with the most pronounced effects in the meat and livestock sectors. Using general

Equilibrium models to assess the impact of the Brexit on Agriculture allows to take the budget

question into account. This issue is particularly crucial as the exit of UK from the EU will also

entail a withdrawal from the ‘CAP’ that would results in budget saving for UK. Thus, Boulanger

and Philippidis (2015) show that these gains exceed trade facilitation costs on agrifood trade.


57

2. EUROPEAN UNION AND UNITED KINGDOM BILATERAL

TRADE: STATISTICAL OVERVIEW

KEY FINDINGS

The relationship between the EU27 and the UK is marked by dissymmetry: the EU27

is a large market (445 million inhabitants, GDP of USD 13,800 billion), while the UK is

a relatively small country (65.6 million people, GDP of USD 2,600billion).

In the absence of any trade agreement stating otherwise, MFN tariffs will apply to

bilateral trade flows between the EU27 and the UK, and NTMs will increase in the

long term. Protection faced by EU27 exports to UK will be slightly higher than protection

faced by UK exports to EU27: MFN of 18.3% and NTMs of 45.4% for EU27 agri-food

exports and MFN of 14.2% and NTMs of 39.9% for UK agri-food exports.

Agri-food goods represent 11% of bilateral trade flows between the UK and the

EU27. The EU27’s trade balance with the UK is positive: USD 47 billion worth of

agricultural goods are exported to the UK, compared to USD 18 billion worth of

agricultural imports.

We rank sectors and countries by trade value weighted by potential protection, to

highlight those potentially most impacted by Brexit. The three main EU27 agri-food

sectors are processed food, dairy and meat (for both exports to and imports from

UK). The EU27 countries that trade the most with the UK and will face the highest

protection are France, Netherlands and Ireland.

The situation of Ireland deserves particular attention. Its trade with the UK plays

an important role, especially imports: 27% of Ireland’s European imports are from the

UK, and represent 46% of total Irish agri-food imports (compared to 4% on average

for other European countries). Disruptions caused by Brexit may have particularly

negative impacts on this country because of the large integration of UK products in

Ireland’s exports.

2.1. Macro-economic indicators: a marked dissymmetry

The relationship between the UK and the EU27 is characterized by a marked dissymmetry.

The EU27, as a whole, is a large market with more than 445 million inhabitants and GDP of

USD 13.8 thousand billion, while the UK is a relatively small country, with a population of 65.6

million people and a GDP of USD 2.6 thousand billion (see Table 1). Thus, the EU represents

a very large market and outlet for UK exporters, while the UK, even though integrated with

the EU in terms of trade and value chains, and with a large GDP per capita, is a relatively

small market for European exporters in comparison.50 However, among the EU28, the UK is

a large country: it is ranked third after Germany and France for number of inhabitants and

second after Germany for GDP. Its GDP per capita is among the highest in this group, 33%

higher than the EU27 average. This foreshadows large redistributions of economic activity

across the EU27.

50 Sector and country specificities are discussed later but note that UK is nevertheless an important export market

for some sectors. For instance, 12% of French exports of vegetables and fruits go to UK (10% for Spanish exports)

as well as 14% of French vegetables oils and fats.


58

Table 2: Market size, EU27 (and its first ten Member States, by GDP value) and UK

(2016)

Country GDP (USD bn) GDP per capita (USD)

Population

(mn people)

United Kingdom 2,619 39,899 65.6

EU27 13,779 30,905 445.9

Germany 3,467 41,936 82.7

France 2,465 36,855 66.9

Italy 1,850 30,527 60.6

Spain 1,232 26,528 46.4

Netherlands 771 45,295 17

Sweden 511 51,600 9.9

Poland 470 12,372 37.9

Belgium 466 41,096 11.3

Austria 386 44,177 8.7

Denmark 306 53,418 5.7

Source: World Development Indicators, The World Bank, Authors’ calculations.

2.2. Trade protection

2.2.1. Tariffs: increase to their MFN level

Once the UK leaves the EU, if no relevant trade agreement has been signed to the contrary,

the MFN tariff will apply to bilateral trade between the UK and the EU27.

Although MFN tariffs are the same across all EU countries, faced protection will depend on the

trade patterns of each individual trade partner. For instance, a very high tariff imposed on a

product that is not traded at all is less restrictive than a lower tariff on a much more traded

good. The way applied protection is computed is detailed in Bouët et al. (2008). As a result,

the average MFN duty that EU27 could apply to imports from the UK is 18.3% and

3.2% for agricultural and manufactured goods respectively, while EU exports could

face respective average tariffs of 14.2% and 2.6% (Table 2). Agricultural products

benefits from a higher MFN protection. This reflects the importance of sensitive sectors such

as sugar, bovine products (meat and dairy) and animal products more generally (see Tables

4 and 5).

2.2.2. Non-tariff measures (NTMs): increase in their trade-restrictiveness

NTMs arguably play a dominant role in restraining imports. Table 2 shows that NTMs follow

the same general pattern as protection used by European countries, being more restrictive in

the case of agricultural goods compared to manufactured products. Thus, EU27 agriculture

exports to the UK face average NTMs trade restrictiveness of 26.01% (14.37% for

industrial goods), slightly higher than those imposed by the EU27 on UK exports

(22.78% and 13.37%, for agriculture and manufactured goods, respectively).


59

In the absence of any agreement between the EU27 and the UK after Brexit, new technical

and non-technical measures applied by the two regions will probably diverge in the mid-term,

accounting for different consumer preferences and trade policies. In the short term,

certification procedures will be more complex with the end of the common market and anti-

dumping procedures (or other temporary measures) could be applied to bilateral trade flows.

This will result in NTMs whose trade restrictiveness will increase over time. It is difficult to

quantify the extent of this increase but it is important to take it into account since NTMs

represent the main trade protection. Table 2 reports the values used in the simulation

exercises for present and 2030 projected trade restrictiveness of NTMs. These values for NTMs

trade restrictiveness are documented in Annex B (pre-Brexit NTMs) and Section 4.2 (post-

Brexit NTMs).

Table 3: Trade flows and protection, EU27 – UK

Trade flows Protection

Value (USD

million)

%of EU

trade

%of

world

trade

NTMs

pre

Brexit (%)

MFN (%)

NTMs

post

Brexit (%)

EU exports

Non Agric. goods 305,864 6.67 1.86 14.37 3.22 26.15

Agric. goods 47,306 8.81 3.25 26.01 18.29 45.40

Total 353,170 6.90 1.97 15.62 4.85 28.23

EU imports

Non Agric. goods 196,122 4.35 1.19 13.37 2.59 24.17

Agric. goods 17,954 3.79 1.23 22.78 14.20 39.89

Total 214,076 4.29 1.2 14.07 3.45 25.34

Source: Authors’ calculations based on tariffs from MAcMap-HS6, NTMs from Kee et al. (2009) and trade from BACI

(see Annex A for details on data sources).

Note: Trade flows are mean values for the period 2013–2015. Current tariff protection is not reported since it does

not apply. The AVEs of the MFN tariffs refer to 2013. Two NTM values are reported, present AVE and projected AVE

in the absence of a specific trade agreement when the UK leaves the EU.

2.3. Trade flows

The UK is the second largest (after the USA) EU export market (worth USD 353 billion, and

6.9% of EU exports, annual trade flow, average over the period 2013-2015, see Table 3) in

trade value; EU trade is mainly among members. At the same time, the EU27 is the UK’s

largest export market (USD 214 billion and 46% of UK exports).

Trade consists mostly of non-agricultural goods (i.e., goods that are not covered by the WTO

Agreement on Agriculture51), agri-food representing only 11% of trade flows. This structure

of more manufactured goods than agricultural goods is not a specificity of the trade

relationship with the UK but reflects a pattern that is common to most developed countries.

51 The exact product coverage is provided in Annex I of the Agreement on Agriculture:

https://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm#annI


60

The EU27’s trade balance with the UK is positive for both manufactured and agricultural

goods.52 USD 47 billion worth of agricultural goods are exported to the UK, compared to USD

18 billion worth of agricultural imports. Additionally, the share of exports to the UK in total EU

exports is larger than the share of imports, and especially in the case of agricultural goods

(8.8% vs. 3.8%); also, the protection applied to exports (44.3% for agriculture) is higher than

that imposed on imports (37% for agriculture). The combination of these three elements

(positive trade balance, larger trade share, and protection), means that larger impacts can

be expected on European exports (producers) compared to European imports

(consumers).

Table 4: Main export destinations of EU27 and UK, total trade

EXPORTER: EU27 EXPORTER: UK

IMPORTER VALUE

(USD mn)

% TOT

EXPORTS IMPORTER

VALUE

(USD mn)

% TOT

EXPORTS

EU27 2,789,746 54.49 EU27 214,076 46.45

UK 353,170 6.9 USA 52,038 11.29

USA 341,399 6.67 Switzerland 25,353 5.5

China 184,246 3.6 China 24,551 5.33

Switzerland 145,317 2.84

Un. Arab

Emirates 12,066 2.62

Russia 116,929 2.28 Hong Kong 10,009 2.17

Turkey 86,429 1.69 Canada 7,805 1.69

Japan 67,452 1.32 Saudi Arabia 7,062 1.53

Rep. of Korea 53,041 1.04 Rep. of Korea 6,923 1.5

Norway 52,045 1.02 Japan 6,588 1.43

Source: Authors’ calculations, using BACI.

Note: Trade flows are mean values over the period 2013–2015, for all goods (agri-food and manufacture).

2.3.1. Main trading sectors potentially impacted: processed food, dairy and meat.

In the context of agriculture, the most traded products between the EU27 and the UK, by

value, are processed food products53, beverages and meat and dairy products. However, to

estimate the impact of Brexit, it is relevant to also consider the protection faced by trade

flows. Therefore, we sort sectors by trade flow value multiplied by potential ad

valorem protection, were MFN and more restrictive NTMs to be applied, resulting in what

we describe in what follows as “Protection Revenue”. We also investigate trade patterns in

more depth using information available at the HS6 level (the statistics at HS6 level are

presented in Appendix D, see Annex A.4 for details on data sources).

52 For the sake of comparison, total UK trade imbalance amounts to € 29 billion per year on average over the period

2013 – 2015 (source: Eurostat) 53 The “Other food” sector discussed here is unfortunately a residual sector in the original GTAP database, gathering

all processed food not classified elsewhere (i.e. different from vegetal oils, processed rice and sugar or dairy

products).


61

Processed food products represent the main export flow to the UK and the most

heavily protected – amounting to almost USD 17 billion, representing 10% of European food

exports (see Table 4). At the HS6 level, the most protected goods which would generate the

highest revenue within the processed food sectors are dog and cat food, France is the biggest

exporter to the UK (25%) in these sectors, followed by various animal feed preparations

(France, 20%). Imports of communion wafers, rice paper and baking materials from Germany

(23%) have an export value of over USD 1.5 billion but attract a fairly low MFN tariff of 5.5%.

The next export sectors after processed food ranked by protection revenue are Dairy

products and Meat products n.e.c. Despite their smaller flows in terms of value, these

two sectors are ranked second and third since they would face very high levels of

protection, with MFN duty of around 40% and NTMs increasing from 42% to 74% for dairy,

and MFN of 22% and NTMs of 43% for meat products. In each of these sectors, exports to UK

represent around 10% of total EU exports. In relation to dairy products, Ireland and France

are the main exporters of what are likely to be most heavily affected HS6 products, such as

cheese, fresh cheese, butter, buttermilk and some processed cheese. The GTAP category Meat

Products is a residual category which includes all meat products not included in other GTAP

sectors. It thus includes a variety of different products, some of which account for a significant

part of European exports, e.g. swine meat, poultry, cuts and offal (frozen and fresh), swine

cuts, sausages, meat offal and blood. The main exporters to the UK of these products are

Denmark, the Netherlands and Germany.

Beverages and tobacco, and Vegetables and fruit are ranked respectively fourth and fifth

for the most affected export products. Czech Republic exports one-third of the first HS6

product (cigarettes containing tobacco) in the Beverages and tobacco category. France ranks

second accounting for almost 50% of exports of grape wines n.e.s. Netherlands is another

important exporter, ranking first for non-alcoholic beverages (excluding vegetable and fruit

juices), denatured ethyl alcohol and cigarette-pipe tobacco. Finally, the European trade flows

at the HS6 level that will suffer the most in the Vegetables and fruit sector are tomatoes,

cucumbers and gherkins, mushrooms, mandarins, clementines and citrus hybrids, cauliflowers

and headed broccoli. The Netherlands is an important exporter to the UK of the first two

products (48% and 55% of European exports), Ireland is the main exporter of mushrooms

(55%) and Spain’s exports to the UK of cauliflowers and broccoli amount to 88% and 79% of

the total.

EU imports from UK follow a similar pattern (see Table 5). The main imported products, by

value, are food products and beverages; however, if value is weighted by protection, dairy

products, bovine meat and other meat products are among the most heavily affected products,

because of the high level of protection they attract. For instance, the AVE protection would be

of more than 130% for dairy products if both MFN and NTMs are considered. As already

mentioned, the EU27’s reliance on UK imports is less significant than their reliance on exports

to the UK: for the first five sectors in Table 5, imports from the UK represent between 8% and

3% of total European imports in the sector considered. Table 7 shows that Ireland will be the

most heavily affected country, as discussed more in details in the following section, since it is

the main importer of HS6 products within the beverages and tobacco, the dairy and the bovine

meat categories.54

54 In particular, Ireland is the main importer of cigarettes containing tobacco, water and non-alcoholic beverages

n.e.s. (beverages and tobacco sector), milk not concentrated, cheese, fresh cheese and powdered milk and cream

(dairy sector). In the bovine meat sector, Ireland import almost one-third of UK exports of boneless, fresh or

chilled bovine cuts, and France imports 65% of fresh and chilled lamb carcasses and half carcasses.


62

Table 5: EU27 exports to the UK in agri-food sectors and faced protection

SECTOR

TRADE PROTECTION

TRADE VALUE

% of EU

TRADE

NTMs

(%, pre Brexit)

MFN (%)

NTMs

(%, post

Brexit)

PROT. REV.

Food products nec 16,917 9.76 35.32 13.64 61.87 12,773

Dairy products 4,095 7.59 42.32 41.05 74.14 4,717

Meat products nec 5,849 12.92 24.61 22 43.1 3,808

Beverages and tobacco

products 7,186 9.18 14.28 13.24 25.02 2,749

Vegetables fruit nuts 5,147 11.03 18.13 11.81 31.76 2,243

Bovine meat products 1,520 8.64 24.09 55.76 42.2 1,489

Vegetable oils and fats 1,688 5.85 21.68 15.23 37.98 898

Crops nec 1,933 8.41 16.58 6 29.05 678

Processed rice 172 13.18 93.11 23.42 163.11 320

Bovine cattle, sheep and

goats, horses 488 2.55 24.59 7.48 43.08 247

Sugar 490 8.7 10.98 29.67 19.24 240

Animal products nec 300 6.44 6.67 57.63 11.69 208

Cereal grains nec 419 3.7 15.67 13.27 27.45 171

Fishing 636 8.35 9.92 8.35 17.38 164

Wheat 178 2.33 32.33 0 56.63 101

Oil seeds 477 2.85 0.01 16.91 0.02 81

Forestry 155 2.95 8.41 0.38 14.73 23

Paddy Rice 50 14.51 7.57 17.44 13.26 15

Sugar cane sugar beet 7 12.48 0.21 170.45 0.36 12

Wool silk worm cocoons 21 8.18 0.21 0.43 0.37 0

Source: Authors’ calculations based on tariffs from MAcMap-HS6, NTMs from Kee et al. (2009) and trade from

BACI.





63

Table 6: EU27 imports from the UK in agri-food sectors and faced protection

SECTOR

TRADE PROTECTION

TRADE VALUE

% of EU TRADE

NTMs (%, pre Brexit)

MFN (%)

NTMs (%, post Brexit)

PROT. REV.

Food products nec 6,806 4.37 34.73 11.8 60.84 4,944

Dairy products 1,564 4.08 47.78 42.53 83.7 1,974

Bovine meat products 1,165 6.86 26.41 50.54 46.27 1,127

Meat products nec 1,234 3.63 32.94 21.09 57.7 972

Beverages and tobacco

products 4,176 8.86 9.2 4.22 16.12 849

Sugar 303 4.69 28.88 66.88 50.58 355

Vegetable oils and fats 487 1.18 27.89 7.8 48.86 276

Vegetables fruit nuts 600 1.09 16.48 8.44 28.88 224

Fishing 848 7.53 9.78 6.85 17.13 203

Bovine cattle sheep and

goats horses 348 9.19 28.24 5.74 49.47 192

Animal products nec 503 3.00 15.78 2.98 27.65 154

Crops nec 374 2.05 19.12 32.48 33.49 143

Cereal grains nec 214 1.04 11.41 4.8 19.99 112

Processed rice 41 2.44 94.63 23.89 165.77 77

Oil seeds 256 1.52 16.45 0 28.81 74

Wheat 179 2.14 0.98 18.61 1.72 36

Forestry 89 1.45 13.21 0.12 23.14 21

Paddy Rice 9 1.42 21.42 38.35 37.52 7

Sugar cane sugar beet 2 4.52 4.03 128.61 7.06 3

Wool silk worm cocoons 19 2.74 9.18 0.28 16.08 3

Source: Authors’ calculations based on tariffs from MAcMap-HS6, NTMs from Kee et al. (2009) and trade from BACI.




2.3.2. Main European trading countries: France, Netherlands and the particular

case of Ireland

If we consider total trade rather than just agri-food, the European countries that trade the

most with the UK, and which will be most affected by Brexit, are Germany, the Netherlands

and France. These countries’ bilateral trade with the UK represents 50% of total EU27 bilateral

exchanges. This ranking is unchanged if we consider exports and imports separately.


64

Ireland is in a particular position as noted above. Ireland is ranked fifth behind Belgium,

as a European trading partner of the UK. Ireland’s exports to the UK represent some USD 19

billion a year, and it is the seventh European exporter to UK by value, representing around

5% of European exports. In terms of imports, Ireland is more important: it is the fourth most

important importer by value (USD 23.4 bn.) and its weight in European imports is larger (11%)

than for exports. What is striking is the share of these flows in Ireland’s total trade flows: Irish

exports to the UK represents 13% of Ireland’s total exports (compared to around 4% for the

main European exporters to the UK), and 31% of Irish imports come from the UK. In the light

of the important role of the UK as a destination market and as a source of imports, the impact

of Brexit on Irish trade and the Irish economy will likely be very large.

When considering only agri-food trade (see Table 6 and Table 7), France and the

Netherlands are the main UK partners, and Ireland replaces Germany in the top three

by bilateral trade value. The three main partners account for half of UK imports and exports

in the agri-food sectors. Again, trade with the UK is highly important for Ireland, especially

imports: 27% of Ireland’s European imports are from the UK, and represent 46% of total Irish

agri-food imports (compared to 4% on average for other European countries). However,

although Irish exports represent 15% of European agri-food exports to UK, they account for

less than 5% of total Irish agri-food imports which, nevertheless, is higher than other

European countries.

Combining country and sector details does not introduce different sectors in the list of top

traded goods: the main importers and exporters trade mainly in processed food, dairy and

meat products, and beverages and tobacco. The pattern at country level is in line with the

pattern in Table 5: trade in dairy and meat products frequently follows trade in beverages for

value although the former are likely to be more affected by high protection.

Table 7: EU27 exports to the UK in agri-food sectors and faced protection, by

country (top ten, by protection revenue)

COUNTRY

TRADE PROTECTION

TRADE VALUE

% of EU TRADE % of total

agri. exports of the country

NTMs (%,

pre Brexit) MFN

NTMs (%,

after Brexit)

Netherlands 9,519 20.12 1.89 26.54 17.84 46.5

Ireland 6,903 14.59 4.58 28.2 20.6 49.41

France 6,971 14.74 1.23 23.91 17.3 41.89

Germany 5,860 12.39 0.43 28.75 19.33 50.37

Belgium 3,602 7.62 0.95 32 16.97 56.06

Italy 3,807 8.05 0.77 28.27 16.63 49.53

Spain 4,051 8.56 1.35 19 18.08 33.28

Poland 1,801 3.81 0.89 28.19 21.33 49.38

Denmark 1,843 3.9 1.85 22.3 20.53 39.06

Portugal 437 0.92 0.69 23.6 18.48 41.35






65

Table 8: EU27 imports from the UK in agri-food sectors and faced protection, by

country (top ten, by protection revenue)

COUNTRY

TRADE PROTECTION

TRADE VALUE

% of EU TRADE % of total

agri. exports of the country

NTMs (%,

pre Brexit) MFN

NTMs (%,

after Brexit)

Ireland 4796 26.71 46.01 23.68 14.2 41.47

France 2578 14.36 4.59 25.81 14.2 45.22

Netherlands 2462 13.72 3.81 21.57 14.2 37.78

Germany 1878 10.46 2.03 23.83 14.2 41.75

Spain 1236 6.89 3.82 21.93 14.2 38.42

Belgium 1086 6.05 2.68 21.68 14.2 37.98

Italy 745 4.15 1.57 24.44 14.2 42.81

Sweden 519 2.89 3.99 19.38 14.2 33.94

Denmark 470 2.62 3.82 20.79 14.2 36.42

Poland 478 2.66 2.64 17.17 14.2 30.08





2.3.3. High integration of agri-food value chains through trade

The value chains of UK and EU27 agri-food sectors are highly integrated; for instance,

almost half of the value-added in UK’s food exports that is generated outside the UK, is

produced in the EU27, amounting to 12.58% of total exported value-added (Table 9). Due to

the difference in the size of the UK and the EU27, the UK’s share in European agricultural and

agri-food exported value added is lower (1.45% for agriculture, and 2.11% for food in 2011,

see Table 8) than the EU27 in the UK’s exported value added (10.53% for agriculture and

12.58% for food, see Table 9).

The UK’s share of value added is slightly higher in European exports of food, beverages and

tobacco than of agricultural products since agricultural production is less dependent on inputs

than manufacturing.

The intensity of the linkages with UK varies across EU countries (Table 8). The UK accounts

for a high share of Ireland’s export value-added (particularly in relation to the agricultural

sector – 11.58%), followed by the Netherlands (2.37%), Denmark (2.24%) and Belgium

(2.06%). Ireland is also a particular case when considering the evolution in time of the share

of value added generated by the UK which is included in its exports: during 2000-2011,

Ireland’s dependence on imports from the UK’s agricultural sector increased (its dependence

on agri-food sector decreased slightly) from 8% to 12%, while the dependence of other EU27

countries remained almost constant.


66

The share of EU27 value added in UK exports is large and increased significantly between

2000 and 2011, evidence of further integration of UK agricultural and agri-food production

with EU members (Table 9). These linkages are particularly important with Germany, France

and Netherlands, in the case of both agriculture and food products

Table 9: UK value-added in EU27 exports (% of gross export of EU27 countries)

EXPORTING COUNTRY

AGRICULTURE, HUNTING, FORESTRY AND FISHING

FOOD PRODUCTS, BEVERAGES AND TOBACCO

2000 2011 2000 2011

EU 27 1.42% 1.45% 2.09% 2.11%

Netherlands 2.13% 2.37% 2.65% 2.44%

France 1.34% 1.16% 1.47% 1.36%

Spain 1.07% 1.19% 1.76% 1.90%

Germany 1.09% 1.42% 1.16% 1.41%

Ireland 7.97% 11.58% 9.33% 8.81%

Denmark 1.39% 2.24% 1.71% 2.70%

Belgium 2.30% 2.06% 2.80% 2.10%

Italy 0.49% 0.58% 0.94% 0.82%

Hungary 0.75% 0.92% 0.61% 0.98%

Sweden 1.49% 1.20% 1.92% 1.65%

Source: OECD-WTO, Trade in Value Added database (2016).

Note: EU27 countries are ranked by the value of their imports from UK, in 2011.


67

Table 10: Breakdown of the value-added contained in exports of the UK, by origin

AGRICULTURE, HUNTING, FORESTRY AND FISHING

FOOD PRODUCTS, BEVERAGES AND TOBACCO

2000 2011 2000 2011

Domestic 85.32% 75.98% 83.05% 73.70%

Foreign 14.68% 24.02% 16.95% 26.30%

EU27 7.33% 10.53% 8.73% 12.58%

Germany 1.42% 2.09% 1.61% 2.52%

Netherlands 1.01% 1.51% 1.25% 1.65%

France 1.44% 1.48% 1.63% 1.75%

Spain 0.58% 1.02% 0.75% 1.25%

Ireland 0.54% 0.87% 0.61% 1.11%

Italy 0.68% 0.83% 0.83% 1.07%

Belgium 0.44% 0.51% 0.49% 0.57%

Sweden 0.30% 0.46% 0.36% 0.46%

Denmark 0.21% 0.39% 0.30% 0.47%

Poland 0.06% 0.36% 0.07% 0.46%

rest of EU 0.64% 1.01% 0.84% 1.27%

Source: OECD-WTO, Trade in Value Added database (2016).

Note: EU27 countries are ranked by the value of their exports to UK, in 2011.


68


69

3. MODEL AND SCENARIOS

SUMMARY OF SCENARIOS FOR BREXIT

Return to WTO rules and sensitivity analysis

The scenarios in this report include:

“WTO”: Tariffs between the UK and the EU, and between the UK and Turkey, are increased

up to their MFN levels. Trade restrictiveness of NTMs is increased at these borders.

“WTO (Ireland NTM)”: In addition to “WTO” assumptions, this scenario considers that trade

between Ireland and the EU is subject to additional friction, in particular because of the

disruption caused by transport routes passing through the UK.

“WTO (Tariff only)”: This scenario considers only the increase in bilateral tariffs (and not

the trade restrictiveness of NTMs) up to the MFN level between the UK and EU, and

between the UK and Turkey.

3.1. Modelling framework

The results presented in this impact assessment are based on the MIRAGE model55, a

recursive-dynamic computable general equilibrium model designed for trade policy analysis

(Bchir et al., 2002; Decreux and Valin, 2007; Fontagné et al., 2013). The model is shortly

described in Annex B and a more thorough documentation is available online.56

The MIRAGE model is flexible and can be tailored to different policy questions. In the present

case, we model the agricultural sectors in as much detail as possible. We include 31

distinct sectors (19 agri-food industries, 14 manufacturing sectors and 8 services sectors) and

35 geographical areas. The EU is split into 11 countries or country groups (Belgium and

Luxembourg, France, Germany, Ireland, Italy, Netherlands, Poland, Portugal, Spain, Sweden,

Rest of EU27), the UK and Turkey are treated as separate, and the rest of the world is

aggregated on a regional basis. Details are provided in Annex B.

3.2. Scenarios

3.2.1. The WTO scenario

A return to WTO rules for EU-UK trade means a return to the MFN tariff rate but is likely also

to influence the trade restrictiveness of NTMs. Therefore, for the WTO scenario we assume:

Tariff rates between the UK and EU, and between the UK and Turkey, are set at their

MFN values (see Appendix A for details on data).57

Trade restrictiveness of NTMs increases for EU-UK and Turkey-UK trade with the

result that the UK loses two-thirds of its preferential access to the single market.58

55 The version used in this study is MIRAGE-e version 1.0.4. Environment and energy specific features are not

considered in this exercise. 56 http://www.mirage-model.eu 57 Molinuevo (2017) analyzes the legal implications of the UK’s withdrawal from the EU for third countries. The

consequences for bilateral trade agreements are highly uncertain, in many cases requiring amendments to

continue to cover trade with the UK. However, there is more certainty in the case of the few bilateral agreements

referring only to goods: since they fall within EU exclusive competences, they were negotiated only by the EU,

and will cease to apply to the UK on its withdrawal from the EU. The most significant such agreement, on the basis

of which we make our assumption for the scenarios, is the agreement with Turkey. In this case, we consider a

return to MFN tariffs. Bilateral investment treaties fall into a different category and probably will remain valid also

for UK. 58 This assumption is sourced from the literature, e.g. in Ottaviano et al. (2014) or Dhingra et al. (2016a, 2016b).

Our approach however differs from these studies in the way we calibrate initial NTMs trade restrictiveness, as

detailed in Annex B.

http://www.mirage-model.eu/


70

In agri-food sectors, this could result, for instance, from the introduction of different

conformity procedures on both sides of the Channel, or divergence in the regulations

on substances authorized for inclusion in food products.

While tariffs could be increased in the year that Brexit comes into effect (2019 in our

simulations), the increase in the trade restrictiveness of NTMs is likely to be gradual: on day

1 after Brexit, all rules in the UK will remain the same as in the EU, and divergences will

emerge only in succeeding years as Great Britain and EU27 implement new regulations. A

time frame for this is difficult to predict. As a consequence, we introduce tariffs and NTM

shocks in 2021, and observe their outcome in 2030. The results for the final year of the

analysis should be interpreted as long-term outcomes, after all adjustments have taken

place, independent of the time horizon, and with no adjustment cost other than the slow

adaptation of capital location. In particular, displacement of workers from one sector to the

other happens at zero cost.

As already mentioned, the only two changes we consider after Brexit are related to tariffs and

NTMs. First, this implies that trade policy elements other than tariffs and NTMs are not

modified in our scenarios. In particular, we make no assumptions about tariff rate quotas,

meaning that there is no reallocation of import or export quotas presently allocated to UK

among other EU members, for example. 59 The evolution of these TRQs is important for

exporters, particularly in the agri-food sectors but is highly uncertain and may require

negotiations with trade partners other than the UK. We do not consider any agreement that

the UK or the EU might negotiate between them, or with third parties. Second, the Common

Agricultural Policy and other public policies apart from trade policy, are assumed to remain

constant at their present level in the UK and the EU.60 Again, we do not consider any policy

that might mitigate the negative impacts we identify (Section 1 refers to analyses available in

the literature on possible mitigating policies).

3.2.2. Alternative specifications and sensitivity analysis

NTMs and the amount they might increase by as a consequence of Brexit, are taken from the

literature and are subject to discussion. To cope with this uncertainty, we implemented two

sensitivity scenarios. The outcome of these scenarios is not discussed in detail here. However,

the results which differ from those from the central scenario are useful to highlight the

implications of some of the assumptions we make. The two sensitivity analyses are:

WTO (Tariff Only): In this scenario, only the tariffs increase, up to their MFN level

taken from the MAcMap-HS6 database (see Tables in Section 2.3). The NTMs do not

change compared to the BAU case. This scenario depicts the role played by NTMs (and

the value of their estimated trade restrictiveness).

WTO (Ireland NTM): As mentioned above, Ireland’s trade with the UK follows a

specific pattern for several reasons which include geographical proximity. Matthews

(2017) suggests that a decrease in trade with the UK would imply higher transport

costs for Ireland, with cargoes not fully loaded in both directions, for instance. To

account for these specificities, we consider an additional simple scenario similar to the

WTO scenario but where Ireland is assumed to face higher AVE for NTMs when trading

with the EU. That is, the increase in NTMs will be equal to half of the increase incurred

by the UK.

59 More specifically, we assume that TRQs that were not binding in 2013 remain non-binding for both the EU and

UK, and binding TRQs remain binding for both the UK and EU. 60 In other words, we assume that after Brexit, the UK (and the EU27) will continue to grant the same subsidies and

impose the same constraints as currently.


71

4. IMPACTS OF A WTO SCENARIO ON THE AGRI-FOOD

SECTOR IN THE EUROPEAN UNION

KEY FINDINGS

A return to WTO rules would imply significantly less agri-food trade between the

EU and UK in both directions (around -62%). Some EU exports almost completely

collapse, like those of Rice, White meat, Sugar, Dairy and Red meat (more than -90%

in trade).

Ireland, the Netherlands and France are the EU27 countries that lose the most in

terms of trade.

Brexit also implies more room for EU27 products on their domestic markets and

other EU27 markets – replacing UK products. Nevertheless, this effect fails to

compensate the incurred losses in value-added (see footnote 16 for details on value-

added), with the exception of a few sectors, such as Red meat and Cattle in France,

or Sugar and Wheat in Spain, in which value-added increases.

Brexit could be an opportunity for the UK’s agri-food sectors as a whole.

Excepted in Ireland, consumers are hardly affected by changes in overall

consumption prices or economic activity.

To present and discuss the simulation results, this report focuses first on the most direct

impacts of Brexit, namely the changes to bilateral trade between the EU27 and the UK, and

then studies the more aggregate or indirect impacts (e.g., on total EU27 agri-food value added

or gross domestic product). The following tables and figures may include the results of the

three scenarios described above but only the WTO scenario is discussed in detail in the text;

the other two are cited when highlighting original elements. Most results are presented in

percentage deviation from the BAU scenario, in 2030, both in percentage change and in

volumes. The variations in volume are actually measured in constant 2011 USD, i.e. at the

prices of the initial year.

4.1. A large decrease in EU27-UK agri-food trade flows unevenly

distributed across sectors and EU27 countries

4.1.1. Strong decrease in EU27 exports to UK, compensated by exports to other

countries only in a few sectors

As expected, the direct effect of applying WTO rules to European agri-food exports to the

UK is large and negative, as shown in Figure 1. These exports decrease by -62% (which

corresponds to USD -33.7 billion - see Table C.1 in Annex C). Depending on the value of MFN

and trade restrictiveness of NTMs, impacts vary widely across sectors, from almost unaffected

sectors (Fiber crops, Wool, Forestry) to the near complete collapse of trade flows for

Rice, White meat, Sugar, Dairy and Red meat, which decrease by more than 90%. The

most affected sectors are also the most traded in the BAU, leading to a loss of trade in volume

by USD -470 million for White meat, Dairy, Red meat, Sugar and Rice taken together.

The least traded sectors before Brexit are the least affected, and their decrease represents a

loss in volume more than ten times smaller at USD -34 million for Fiber crops, Wool and

Forestry combined. This result is in line with Lawless and Morgenroth (2016) who find similar

decreases in EU27 exports to the UK for Sugar, Meat and Dairy. Finally, the largest decrease

in volume concerns Other foods (which consists mainly of dog and cat food, Pastry and Orange

juice).


72

In terms of magnitude, it is important to note that if only tariffs increase (WTO (Tariff only)

scenario), the impacts of Brexit on EU27-UK trade will be almost halved but the ranking

of the sectors at risk remains similar to the ranking in the WTO scenario. A notable exception

is Red meat (and to a lesser extent Sugar and Dairy products), for which a tariff-only scenario

has almost the same impact as the WTO scenario. This underlines that in these compared to

other sectors, protection comes mainly from the MFN tariff, not NTMs.

These direct impacts on European agri-food exports to UK are mitigated by increased

exports towards all other trade partners (see Table C.1 in Annex C). EU27 products tend

to replace former UK exports to the EU27 and to the rest of the World. Indeed, Great Britain

will suffer a loss of competitiveness since its imported inputs, which for the most part

come from the EU27, become more expensive (UK production prices increase, as already

mentioned in Donnellan and Hanrahan, 2016 and depicted in Table 10) ; while at the same

time the decreasing UK demand for EU27 goods make some of their prices decrease. However,

increased exports to countries other than the UK are not of the same order of magnitude

as EU27-UK trade flows, and fail to compensate for the export losses incurred by the

EU27 after Brexit.

At the sector level, two effects will compete, especially in relation to intra-EU27 trade. On

the one hand, as noted above, EU27 exports become more competitive than UK goods,

and EU27 countries tend to gain market shares in destination countries (other than the UK).

On the other hand, a general equilibrium effect is at play: as described below, on average,

EU27 countries become slightly poorer after Brexit, resulting in decreased overall

consumption including in intra-EU27 goods. While the first effect dominates in the majority of

sectors (i.e., exports to the EU27 and to the rest of the world increase), for Animal products,

Cereals, Forestry, the second effect is larger (intra-EU27 exports decrease). This reverse

tendency can be explained by the conjunction of two factors: these goods are at the same

time not much exported by the UK and less substitutable between origins, leaving no room

for trade deviations to the benefit of EU27 countries.

At the global level, trade decreases in the majority of sectors, with only a few increasing

their exports (Wheat, Forestry, Fiber crops, Wool). Finally, recall that agri-food sectors

represent only a small share of EU27 exports. Thus, the impacts are greater on manufacturing

and services, especially in terms of volume.


73

Figure 11: Variations in EU27 export volume to the UK, by sector, 2030

Source: Authors’ calculations using MIRAGE-e. Percentage changes indicated in boxes relate to the WTO scenario

only.

4.1.2. EU27 agri-food imports from the UK: same mechanisms as for imports

The mechanisms at play on EU27 imports from the UK are about the same as for exports. The

level of the MFN tariff is the same for both sides at the HS-6 level, and the trade-restrictiveness

of NTMs varies very little. In value, the impacts are smaller, as shown in Figure 2, because

the UK is not a major exporter of agri-food products. However, the percentage change in

trade is comparable, as are the sector rankings. It should be stressed that the UK is more

specialized in Red meat exports than the rest of the EU27, and this sector is one of those that

faces the largest percentage decrease due to large MFN tariffs and NTMs, hence making the

UK proportionally more vulnerable.


74

Figure 12: Variations in aggregate EU27 imports volume from the UK, by sector,

2030

Source: Authors calculations using MIRAGE-e. Variations with respect to the BAU scenario. Percentage changes

indicated in boxes refer to the WTO scenario.

4.1.3. Most impacted EU27 exporters: the Netherlands, France and Ireland

Country and region-level impacts, depicted in Figure 3, are driven by the level of initial trade

and the export specialization of EU27 countries in their agri-food trade with the UK. The most

affected countries by volume are the Netherlands, Ireland and France; the least

impacted are Sweden and Portugal. This ranking corresponds to the initial trade integration

with the UK: unsurprisingly, the most (resp. least) impacted countries are those with the

closest (resp. loosest) ties with the UK in the agri-food sectors. In terms of volume, the largest

decreases in exports are experienced by the largest exporters to the UK. The variation in

relative impacts (percentage) is more heterogeneous across countries: EU27 countries having

exports concentrated in sectors with the largest tariff and NTM increases, such as Ireland or

Poland (see Table 6), face a very significant decrease in their exports (around 70%). On

the contrary, countries like Spain or France face lower additional barriers on the UK

market due to their specialization, their trade flows decrease by around 50%. This result

echoes the findings in Lawless and Morgenroth (2016) and Davis et al. (2017); these authors

show that the significant concentration of Irish exports to and imports from the UK in a small

number of products with potentially high protection, makes Ireland the most affected country

in terms of trade.


75

The most affected sectors in each EU27 region, i.e., those with the largest variations in export

volume, are presented in Table C.2 in Annex C. Similar to the EU27 aggregation, each and

every trade flow towards the UK decreases with Brexit. The biggest impacts are observed

either because the sector was heavily traded so that even a small percentage decrease

leads to high losses in volume, for instance, Beverages and Tobacco from France (only

16% decrease in exports but corresponding to USD 0.5 billion); or because the sector was not

heavily traded but the trade flow almost disappears, e.g., in the case of White meat

exports from Germany which were worth USD 0.5 billion and decrease by 91%.

Figure 13: Variations in EU27 agri-food exports to the UK, by country, 2030

Source: Authors calculations using MIRAGE-e. Variations with respect to the BAU scenario. Percentage changes

indicated in boxes refer to the WTO scenario.

4.2. Agri-food value-added decreases within the EU27, though

exposure of countries is heterogeneous

The economic situation in the agri-food sectors is determined only partially by trade.

Domestic demand plays a significant role, in particular because domestic production is

often consumed mostly locally with only a small share traded. This section examines agri-food

value-added and the sources of its variation. 61

61 Formally, value-added gathers payments to production factors, in the agri-food sectors in our case. In our

modeling framework it is equivalent to consider value-added or production because they are proportional.

However, magnitude in value-added represents more the contribution of each sector to GDP and the potential

impacts on consumers’ revenues.


76

4.2.1. Agri-food value-added in the EU27: large negative impact in Ireland, very

limited in other EU27 countries

In terms of value-added in the agri-food sectors, Ireland is the most negatively affected

European country by Brexit, with a decrease of 16.3% in value added (see Figure 4). This can

be explained by the large share of Ireland’s production that is exported to the UK, and

the high level of dependence of Ireland on intermediates imported from the UK (see

Table 8) which is highlighted also in Matthews (2015, 2017). In contrast, the agri-food sectors

in the Netherlands and France are less integrated with UK production; thus, despite the large

variations in agri-food exports depicted in Figure 3 (-66% and -51.4% respectively), value-

added in agri-food sectors decreases by a lower order of magnitude, i.e., by 2.7% and 0.3%

respectively for these countries.

The case of the UK is worthy of mention because Brexit would cause British agri-food

value-added to increase by 2.1%. The UK’s imports from the EU27 will be replaced by

domestic production more than by imports from other countries, anyway at the expense of

consumers who face higher prices in both cases (domestic or imported), as discussed below.

These results hide large heterogeneity among the sectors within each country. Table C.3 in

Annex C summarizes the variations in value-added for each country for overall agri-food

production, and for the five most affected (positive or negative impact on volume) sectors.

Other food seems systematically to be the most negatively affected sector with other

sectors at risk varying from one EU27 country to another. In Ireland, Dairy and Cattle are

the sectors most at risk (after Other food), and the reduction in their value-added is highly

significant compared to the initial size of these sectors (-45% and -26% respectively).62 In

other countries, the magnitude of the impacts is lower compared to the sector size: White

meat and Other crops are the most affected sectors in the Netherlands, as are White

meat and Dairy for the rest of the EU27, Vegetables and fruits and Dairy in Italy, and

Dairy in France.

However, a return to WTO rules with Great Britain could represent an opportunity for

those sectors where production replaces former imports from the UK, in their domestic

markets and/or in other EU27 markets. This applies particularly to Red meat, Wheat and

Cattle in France, and Wheat and Sugar in Spain. These results are to be discussed in more

detail below.

62 Although taken from a global model not focused specifically on Ireland, this result is in line with the conclusions

in Donnellan and Hanrahan (2016) which specifically estimates the impact of Brexit on Irish agriculture.


77

Figure 14: Variations in total agri-food value-added by EU27 country and UK, 2030

Source: Authors calculations using MIRAGE-e.

4.2.2. Decomposition of the impacts on value-added in the EU27: losses from

the Brexit are only partly compensated by exports to other countries

There are three sources of variation in sector value-added within the EU27: first, the volume

of exports lost on the UK market; the volume of exports gained on other EU27 markets

and other foreign markets, but more marginally, (see above); and more significantly the

ability of a given sector, in a given country, to replace UK imports with domestic supply.

Figure 5 presents an accounting decomposition of the variation in value-added by source of

variation, separating out the value-added used to satisfy domestic demand, and exports to

the UK, EU27 and the rest of the world, and other sources.63

For every country, value-added losses are driven by the direct effect of decreased

exports to the UK. Ireland and the Netherlands are the countries where agricultural value

added will decrease the most, respectively by 16.3% and 2.7%. In addition, these two

countries experience also a pattern which is different from other EU27 countries. Ireland is

the only country where WTO rules would imply loss of exports to both the EU27 and the

rest of the world and this is due to Ireland’s dependency on intermediates from the UK,

which implies loss of competitiveness in all export markets. In the Netherlands, exports to the

EU27 increase on average although not supply to the domestic market. For other EU27

members, exports to non-UK partners will help to mitigate the losses from the direct

63 In our case, trade restrictiveness of NTMs is represented as an iceberg cost. Iceberg costs imply that part of the

production is lost in the trade process. Therefore, increasing trade protection has some particular impacts on

production, since new trade barriers are partially paid by production. This effect is added to the more classical

price increase due to tariffs.


78

effect of Brexit but will not compensate for it completely. Interestingly, France, Spain and

Germany are the countries where losses in exports to the UK are compensated the most by

exports to other EU27 markets and domestic demand.

Figure 15: Variations in agri-food value-added volume and decomposition by source

in the WTO scenario, 2030


These results for EU27 agri-food value-added are in fact the aggregation of the different

sectors. The last five columns in Table C.3 in Annex C present the same decomposition of

value-added variation for the five most impacted sectors (in terms of absolute variation in

volume). For almost every sector in every country, the interpretation is similar to the

aggregate level: results are driven by the loss of exports to the UK. In some sectors

however, a return to WTO rules could represent an opportunity, when domestic

demand replaces UK imports in an amount greater than the losses suffered on the UK

market, as it is the case for Red meat and Cattle in France or Wheat in Spain. Regarding

Red meat and Cattle, this exception can be explained by the high initial specialization of UK in

these sectors, leaving room for trade deviation after Brexit. Wheat production increases may

also be a consequence of such UK specialization: while beef production increase in many EU27

countries to replace UK products, Wheat is demanded to feed cattle. Besides, Wheat

production in France benefits more from opportunities in other EU27 markets than those

related to the domestic market.


79

4.3. At the macroeconomic level, the impact on EU27 countries is

marginal, except for Ireland

The evolution of European production prices is driven by different forces. On the one hand,

increased prices for intermediate inputs from the UK (due to tariff and NTM increases)

tend to increase production prices. On the other hand, the decrease in UK imports reduces

demand for EU27 goods, and drives prices down. Table 10 shows that, on average, this

second effect dominates in all European countries except Ireland, and production prices

decrease. Because of the agri-food production sector in Ireland’s high dependence on UK

intermediates, the first effect mentioned above prevails and results in increased production

prices.

Table 11: Variations in consumption and production price indexes for agri-food

goods and all goods in the WTO scenario, 2030

CONSUMPTION PRODUCTION

REGION AGRI-FOOD TOTAL AGRI-FOOD TOTAL

Ireland + 5.4 -0.4 + 2.0 -0.4

Sweden + 0.0 -0.3 -0.4 -0.3

France + 0.0 -0.2 -0.2 -0.3

Portugal + 0.0 -0.2 -0.2 -0.2

Belgium and Luxembourg + 0.0 -0.4 -0.4 -0.5

Netherlands + 0.0 -0.5 -0.4 -0.5

Spain + 0.0 -0.3 -0.2 -0.3

Rest of EU27 -0.1 -0.1 -0.2 -0.2

Germany -0.1 -0.2 -0.2 -0.2

Italy -0.1 -0.2 -0.2 -0.2

Poland -0.2 -0.2 -0.3 -0.3

UK + 4.0 -0.9 + 0.2 -1.6


Note: Variations are given in percentage with respect to the BAU scenario.

The two opposite forces described above also affect consumption prices. Increases in tariffs

and trade restrictiveness of NTMs lead directly to an increase in consumption prices,

through the prices of imported goods. On the other hand, consumption prices will follow

possible decreases in production prices. The overall effect on consumption prices is shown

in Table 10. These results contrast with the results for production prices. First, note that the

total consumption price index (including non-agri-food goods) decreases in all EU27

countries, Ireland included. Indeed, in the manufacture sectors, EU27 MFN tariffs and NTMs

levels are lower, hence, the “market effect” of decreased overall demand dominates. For four

EU27 countries or regions (Poland, Italy, Germany, Rest of EU27) the same mechanism is in

operation in agri-food sectors too because none of them is very dependent on imports from

the UK.

On the contrary, in other EU27 regions, the “tariff effect” dominates although the impacts are

very small (less than 0.1%). However, the high dependency of Ireland on goods from the UK

makes consumption prices increase much more (by 5.4%).


80

Finally, although this report focuses on agri-food issues, a detour to overall GDP impacts –

that could be better evaluated if the industry and services, which represents the majority of

economic activity, were represented with more detail – is useful to understand general

equilibrium effects: Brexit means a small decrease in EU27 purchasing power in

general, and this is one of the reasons why domestic and intra-EU27 demand fail to

compensate losses suffered on the UK market by EU27 producers. Indeed, Table C.4 in Annex

C shows that WTO rules would have a moderate impact on EU27 GDP (-0.3%), and this

is the case for most EU27 members (less than a 0.7% decrease). This result is in line with

results in the literature, in particular Booth et al. (2015) which finds a 0.33% decrease in GDP

in 2030.

In contrast, Ireland is strongly affected by Brexit, and its GDP decreases by 3.4% and

might even reach 9.4% if Brexit affects Ireland’s access to EU27 market as in the “WTO

(Ireland NTM)” scenario. Finally, if only tariffs are at stake, all impacts on the EU27 and on

the UK will be marginal.


81

5. CONCLUDING REMARKS

The UK is the second largest EU27 export market (worth USD 353 billion, and 6.9% of EU27

total exports) in trade value; at the same time, the EU27 is the UK’s largest export market

(USD 214 billion and 46% of the UK exports). Agri-food sectors represent 11% of the bilateral

trade and their trade balance is favorable to the EU27. The first three EU27 agri-food sectors,

ranked by the traded value weighted by the protection that could be imposed in a WTO

scenario, are processed food, dairy and meat (both exports to and imports from UK). The

EU27 countries that trade the most with the UK and that will face the highest protection are

France, the Netherlands and Ireland. The large market shares and possible protection,

combined with specialization patterns, foreshadows heterogeneous impacts across countries

and sectors, as well as the redistribution of production across the EU27.

Considering the present situation as a starting point, we simulated the impact of the

application of MFN tariffs on bilateral trade between the UK and the EU27 combined with a

decrease by 2/3s in preferential access of the UK to the EU27 market. These are two crucial

traits of the scenario that could occur after Brexit, in the absence of a trade agreement stating

otherwise. We do not consider any other change in public policies: the CAP remains unchanged

(meaning that EU27 and UK farmers continue to receive the same payments), no policies are

implemented to cope with the possible impacts of Brexit and the UK does not sign any new

trade agreements.

The result of this scenario is a decrease in bilateral EU27-UK trade: in 2030, as compared to

a situation in which UK remains an EU member state, EU27 agri-food exports to the UK will

decrease by USD 34 billion as will imports by USD 19 billion. The increase in trade among

EU27 countries (+1%) and with other regions (+0.9%) does not compensate for the decrease

between the EU27 and the UK, and EU27 total exports diminish by 4.1% (USD -28 billion).

Despite the sizeable impacts on trade flows, overall agri-food production and value-added fall

by a relatively small 0.8%, which corresponds to USD 5.6 billion. Indeed, domestic demand

plays a predominant role in agri-food production. Overall impacts on agri-food exports and

value added are negative in every EU27 country, but their magnitude varies among them.

Ireland, the Netherlands and France loose the largest trade volumes. Impacts are also

heterogeneous across sectors: as far as value added is considered at the EU27 level, the most

negatively affected sectors (by volume) are processed food (USD -10.5 billion, -4.7%), white

meat (USD -5.2 billion, -10.5%) and dairy (USD -4.6 billion, -7%). Nevertheless, Brexit is an

opportunity for a few sectors: for instance, French Red Meat and Cattle respectively increase

their value added by 2.1% and 1.3%, replacing former imports from the UK. It is interesting

to note that agri-food value added increases in the UK (+2%), domestic production replacing

imports from EU27. This is made at the expense of consumers, prices increasing by 4%.

Overall GDP, to which agri-food sectors contribute less than manufacture, is slightly negatively

affected in all countries apart from Ireland and the UK, where GDP significantly decreases by

3.4% and 2.4%, respectively.

The increase in both NTMs and tariffs contribute to these results: impacts are much smaller if

only tariffs increase. In the majority of sectors, the increase in NTMs is nearly twice the one

in tariffs and drives the impacts on trade. Nevertheless, this is not the case for Red Meat, and

to a lesser extent Sugar and Dairy, which are mainly protected by tariffs. Since Red Meat and

Dairy are among the most impacted sectors, the decrease in overall EU27 agri-food value

added is not much different between our main scenario and a scenario considering only an

increase in tariffs (-0.8% vs -0.6%).


82

It is important to note that all the impacts considered here do not account for adjustment

costs. For instance, the reallocation of production factors, with the exception of capital stocks,

is made without frictions. Furthermore, the results have to be interpreted as long-term ones,

once reallocations are completely done.

Expected impacts on Ireland are particularly concerning: Irish GDP loss exceeds the British

one. Indeed, Irish agri-food sectors (and more generally the economy as a whole) are highly

dependent on trade with the UK, especially on intermediate consumptions’ imports. As a

consequence, Ireland deserves particular attention when considering redistributive policies to

mitigate Brexit's negative impacts. More generally, trade policy options to alleviate the

negative impacts we report may consist in limiting the increase in protection on EU27-UK

bilateral trade for sectors at risk, and addressing trade impacts of NTMs in a potential trade

agreement.


83

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87

ANNEX A: DATA

This annex briefly describes the databases used for the descriptive analysis and the

quantitative assessment in this report.

A.1. The BACI database

BACI (Gaulier et al. 2010) is a world trade database developed by CEPII.64 Original data are

provided by the United Nations Statistical Division (available from the COMTRADE database).

BACI is constructed using an original procedure which for each bilateral trade flow which

ensures the consistency between the exporters’ and importers’ declarations. This

harmonization procedure increases the number of countries for which trade data are available

compared to the original data. BACI provides trade bilateral values and quantities for each

product as defined in the 6-digit United Nations Harmonized System (hereafter HS6), for more

than 200 countries since 1995. In this report, we use BACI data from the 1996 revision of the

HS6 classification. In what follows, we examine average trade flows during the period 2013–

2015 (the three most recent years for which BACI data are available) in order to consider a

stable reference situation that does not reflect the particular economic situation in a given

year. This choice is also motivated by our interest in the long term effects of Brexit.

A.2. The MAcMap-HS6 database

The MAcMap-HS6 database (Bouët et al. 2008, Guimbard et al. 2012) provides ad valorem

equivalents (percentage, AVE) of the tariffs applied by 190 importing countries to 220

exporting countries on 5,113 HS6 products, in 2011 and 2013. The database also contains

MFN (most favored nation) and bounds tariffs (upper bound tariff for each country, negotiated

at WTO ministerial meetings). This database allows detailed tariff scenarios to be calculated.

For this purpose, reference groups’ weighting schemes are used to preserve the heterogeneity

of tariffs and to limit the endogeneity bias between trade flows and customs duties.

A.3. Non-Tariff Measures

Trade protection involves both tariffs and other measures that can limit market access. Non-

tariff measures (NTMs) are a heterogeneous set of ”policy measures other than ordinary

customs tariffs that can potentially have an economic effect on international trade in goods,

changing quantities traded, or prices or both.”65 This is a broad definition, and it is not

uncommon for the more detailed classification provided by the MAST group66 to be considered

in order to distinguish among technical measures, non-technical measures and measures

applied to exports (the first two categories concern only imports). For instance, some

frequently used technical measures include sanitary and phytosanitary measures (e.g.,

tolerance limits for pesticide residues, or labeling requirements), and pre-shipment inspection

obligations. Non-technical measures can include other traditional trade policy instruments

such as rules of origin, quotas, price controls etc., and behind-the-border measures such as

public procurement and trade-related investment measures.

To account for the impact of these three categories of NTMs on goods, in the following we

consider their AVE, based on the estimations in Kee et al. (2009). Kee et al. employ a two-

step approach: first, they estimate the impact of NTMs on trade flows; second, they calculate

the AVE of these impacts (i.e., the duty that would have the same effect on trade flows) using

import demand elasticities taken from Kee et al. (2008). They propose AVEs for NTMs imposed

by 78 countries on 4,575 products in the HS6 nomenclature.

64 See also http://www.cepii.fr/CEPII/fr/bdd_modele/presentation.asp?id=1 65 UNCTAD/DITC/TAB/2009/3, 66 http://unctad.org/en/Pages/DITC/Trade-Analysis/Non-Tariff-Measures/MAST-Group-on-NTMs.aspx,

http://www.cepii.fr/CEPII/fr/bdd_modele/presentation.asp?id=1


88

Although the focus in this report is on the agri-food sectors, we account also for the possible

broader consequences of Brexit on trade policies. In particular, our scenarios consider changes

in the non-tariff measures applied to services. We use the MIRAGE model which relies on

Fontagné et al.’s (2016) data on trade restrictiveness in the services sectors which provide

AVEs of restrictions on cross-border trade in services for 118 countries and 9 sectors, using

the GTAP database of trade in services for 2011.

A.4. The GTAP database

GTAP 967 brings together the social accounting matrices (SAMs) of 140 countries (or groups

of countries) covering the world economy, in a 57 sector nomenclature, for the year 2011. A

SAM is an extension of the input-output tables in national accounts, merged with a trade

matrix that links countries. In order to reduce the calculation dimension to a manageable level,

the GTAP database is aggregated on its two dimensions (country-sectors). Aggregations are

specific to each study; the one used here is presented above in Table B.1 and B.2.

The 21 traded GTAP agricultural sectors (raw milk is a non-traded sector) can also be mapped

to the HS6 international trade classifications. To maintain consistency between the descriptive

analysis of the actual trade statistics (Section 3) and the Brexit impact assessment (Section

5), the report presents trade statistics for GTAP sectors.68 These statistics are based on

aggregating BACI data using the available correspondence tables69 between GTAP sectors and

HS6 products. Table D.1 shows that some sectors contain only a few products (e.g., Processed

Rice includes only two HS6 lines, 100630 and 100640) others contain numerous HS6 lines

(e.g., among others, Meat products n.e.c. – 43, Vegetable, oils and fats – 47), while Food

products n.e.c. sectors include nearly 250 products. We take advantage of the HS6 dimension

of our trade data by identifying the most traded HS6 products in the sectors that will be most

affected by the negative impacts of Brexit on trade. Thus, we retain the first five GTAP sectors

in Table 4 (exports) and 5 (imports). For each of these sectors, we rank the first five HS6

products in order of importance, based on trade flows weighted by future trade protection. We

also identify the countries with the highest level of trade in each of these five HS6 products.

Tables D.2 and D.3 report imports and Tables D.4 and D.5 report exports. We comment on

the figures wherever necessary.

67 See https://www.gtap.agecon.purdue.edu. 68 Complete trade statistics at the HS6 product level are also provided, in the Annex. 69 See: http://wits.worldbank.org/product_concordance.html

http://wits.worldbank.org/product_concordance.html


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ANNEX B: MODEL DESCRIPTION

B.1. The MIRAGE model

The MIRAGE model70 is a recursive-dynamic computable general equilibrium model designed

for trade policy analysis (Bchir et al., 2002; Decreux and Valin, 2007; Fontagné et al., 2013).

It relies on the GTAP9 database for social accounting matrices; tariff protection is taken from

MAcMap-HS6 database (Guimbard et al., 2012), trade restrictiveness of non-tariff measures

is sourced from Kee et al. (2009) for goods, and from Fontagné et al. (2016) for services.

Finally, the trade costs related to time delays and delivery uncertainties due to infrastructure

and administration problems are from Minor (2013).71

Supply side

On the supply side, each sector in MIRAGE is modeled as a representative firm, whose

production function combines value-added and intermediate consumption in fixed shares.

Value-added is a bundle of imperfectly substitutable primary factors (capital, skilled and

unskilled labor, land and natural resources); intermediates are represented by a bundle of

imperfectly substitutable goods.

MIRAGE-e assumes full employment of primary factors. Skilled and unskilled labor is perfectly

mobile across sectors but immobile across countries while natural resources are sector

specific, and land is only (imperfectly) mobile between agricultural sectors. Installed capital is

assumed to be immobile (sector-specific) while investments are allocated across sectors

according to their rates of return. The overall stock of capital evolves through a combination

of capital formation and a 6% constant rate of capital depreciation. Gross investment is

determined by combining the saving and current accounts. Finally, while total investment is

savings-driven, its allocation is determined by the rate of return from the various activities.

Consumers

On the demand side, the representative consumer from each country/region maximizes

instantaneous utility under a budget constraint. Expenditure is allocated to commodities and

services according to a LES-CES (linear expenditure system – constant elasticity of

substitution) function. This implies that above a minimum consumption of the goods produced

by each sector, consumption choices among the goods produced by different sectors are made

according to a CES utility function.

Trade

Within each sector, total demand for each good (final, intermediate and investment) is

differentiated by origin. A nested CES function assigns a particular status for domestic

products according to the usual Armington hypothesis: consumers’ and firms’ choices are

biased towards domestic production, and therefore, domestic and foreign goods are

imperfectly substitutable according to a CES specification.

Business-as-usual (BAU) scenario

Before considering counterfactual scenarios, a business-as-usual growth path for the world

economy, referred to as the “reference” simulation (or “BAU”), is simulated up to 2030 in our

case. In this BAU scenario, the MIRAGE model is calibrated to match the trajectories obtained

from the EconMap baseline database (Fouré et al., 2013). More precisely, in the MIRAGE

model, total factor productivity is computed in order to allow GDP to match the growth path

70 The version used in this study is MIRAGE-e version 1.0.4. Environment and energy specific features are not

considered in this exercise. 71 Minor (2013) follows the methodology in Hummels and Schaur (2013).


90

derived from EconMap, under constraints on population, skilled and unskilled labor, savings

and current account evolutions. The model is calibrated on 2011 data, therefore, we update

the tariff levels for 2013 to match most recent MAcMap-HS6 data.

B.2. Aggregation of regions and sectors for the present study

Table B.1: Aggregation of regions

MIRAGE

region GTAP region

Africa

Middle East

Bahrain (BHR), Iran Islamic Republic of (IRN), Israel (ISR), Jordan (JOR), Kuwait

(KWT), Oman (OMN), Qatar (QAT), Saudi Arabia (SAU), United Arab Emirates (ARE),

Rest of Western Asia (XWS)

North Africa Egypt (EGY), Morocco (MAR), Tunisia (TUN), Rest of North Africa (XNF)

SACU Botswana (BWA), Namibia (NAM), South Africa (ZAF), Rest of South African Customs

Union (XSC)

Sub-saharan

Africa

Benin (BEN), Burkina Faso (BFA), Cameroon (CMR), Cote d'Ivoire (CIV), Ghana

(GHA), Guinea (GIN), Nigeria (NGA), Senegal (SEN), Togo (TGO), Rest of Western

Africa (XWF), Central Africa (XCF), South Central Africa (XAC), Ethiopia (ETH), Kenya

(KEN), Madagascar (MDG), Malawi (MWI), Mauritius (MUS), Mozambique (MOZ),

Rwanda (RWA), Tanzania United Republic of (TZA), Uganda (UGA), Zambia (ZMB),

Zimbabwe (ZWE), Rest of Eastern Africa (XEC)

Turkey Turkey (TUR)

Asia

ASEAN

Cambodia (KHM), Indonesia (IDN), Lao People's Democratic Republic (LAO), Malaysia

(MYS), Philippines (PHL), Singapore (SGP), Thailand (THA), Viet Nam (VNM), Rest of

Southeast Asia (XSE)

China and

Hong-Kong China (CHN), Hong Kong (HKG)

India India (IND)

Japan Japan (JPN)

Korea Korea Republic of (KOR)

Rest of Asia

Mongolia (MNG), Taiwan (TWN), Rest of East Asia (XEA), Brunei Darussalam (BRN),

Bangladesh (BGD), Nepal (NPL), Pakistan (PAK), Sri Lanka (LKA), Rest of South Asia

(XSA)

EU27

Belgium and

Luxembourg Belgium (BEL), Luxembourg (LUX)

France France (FRA)

Germany Germany (DEU)

Ireland Ireland (IRL)

Italy Italy (ITA)

Netherlands Netherlands (NLD)

Poland Poland (POL)

Portugal Portugal (PRT)

Rest of EU27

Austria (AUT), Cyprus (CYP), Czech Republic (CZE), Denmark (DNK), Estonia (EST),

Finland (FIN), Greece (GRC), Hungary (HUN), Latvia (LVA), Lithuania (LTU), Malta

(MLT), Slovakia (SVK), Slovenia (SVN), Bulgaria (BGR), Croatia (HRV), Romania

(ROU)


91

MIRAGE

region GTAP region

Spain Spain (ESP)

Sweden Sweden (SWE)

North America

Canada Canada (CAN)

Mexico Mexico (MEX)

USA United States of America (USA)

Oceania

Australia and

New Zealand Australia (AUS), New Zealand (NZL)

Oceania Rest of Oceania (XOC)

Rest of Europe

CIS countries

Belarus (BLR), Ukraine (UKR), Rest of Eastern Europe (XEE), Kazakhstan (KAZ),

Tajikistan (TJK), Kyrgyzstan (KGZ), Rest of Former Soviet Union (XSU), Armenia

(ARM), Azerbaijan (AZE), Georgia (GEO)

EFTA Switzerland (CHE), Norway (NOR), Rest of EFTA (XEF)

Russia Russian Federation (RUS)

Rest of the World

Rest of the

World

Rest of North America (XNA), Albania (ALB), Rest of Europe (XER), Rest of the World

(XTW)

South America

Brazil Brazil (BRA)

Rest of Latin

America

Bolivia, Plurinational Republic of (BOL), Chile (CHL), Colombia (COL), Ecuador (ECU),

Peru (PER), Venezuela (VEN), Rest of South America (XSM), Costa Rica (CRI),

Guatemala (GTM), Honduras (HND), Nicaragua (NIC), Panama (PAN), El Salvador

(SLV), Rest of Central America (XCA), Dominican Republic (DOM), Jamaica (JAM),

Puerto Rico (PRI), Trinidad and Tobago (TTO), Caribbean (XCB)

Rest of

Mercosur Argentina (ARG), Paraguay (PRY), Uruguay (URY)

United Kingdom

UK United Kingdom (GBR)


92

Table B.2: Aggregation of sectors

MIRAGE sector GTAP sector MIRAGE sector GTAP sector

Agriculture Industry

Animal products Animal products nec (oap) Chemistry Chemical.rubber.plastic prods (crp)

Beverages and Tobacco

Beverages and tobacco products (b_t)

Electronic Electronic equipment (ele)

Cattle Cattle.sheep.goats.horses (ctl) Energy

Coal (coa), Oil (oil), Gas (gas), Petroleum. coal products (p_c), Electricity (ely), Gas manufacture. distribution (gdt)

Cereals Cereal grains nec (gro) Ferrous Metals Ferrous metals (i_s)

Dairy Dairy products (mil) Machinery Machinery and equipment nec (ome)

Fiber crops Plant-based fibers (pfb) Metal products Metal products (fmp)

Fishing Fishing (fsh) Metals n.e.c. Metals nec (nfm)

Forestry Forestry (frs) Minerals Minerals nec (omn), Mineral products nec (nmm)

Oil seeds Oil seeds (osd) Other Manufacturing Manufactures nec (omf)

Other Crops Crops nec (ocr) Paper Paper products. publishing (ppp)

Other food Raw milk (rmk), Food products nec (ofd)

Textile Textiles (tex), Wearing apparel (wap), Leather products (lea)

Red Meat Meat: cattle.sheep.goats.horse

(cmt)

Transport equipment

n.e.c. Transport equipment nec (otn)

Rice Paddy rice (pdr), Processed rice (pcr)

Vehicles and parts Motor vehicles and parts (mvh)

Sugar Sugar cane. sugar beet (c_b), Sugar (sgr)

Wood Wood products (lum)

Vegetable oils and fats

Vegetable oils and fats (vol)

Vegetables and fruits

Vegetables. fruit. nuts (v_f)

Wheat Wheat (wht)

White Meat Meat products nec (omt)

Wool Wool. silk-worm cocoons (wol)

Services

Business Services Business services nec (obs)

Communication Communication (cmn)

Finance Financial services nec (ofi)

Insurance Insurance (isr)

Other Services Water (wtr), Construction (cns), Recreation and other services (ros), Dwellings (dwe)

Public Services PubAdmin/Defence/Health/Educat (osg)

Trade Trade (trd)

Transport Transport nec (otp), Sea transport (wtp), Air transport (atp)

Note: a Raw milk (rmk) is not aggregated with Dairy Products (mil) because this product is not traded at all and an

aggregation would lead to difficulties in interpreting the results.


93

B.3. Non-tariff measures in the MIRAGE model

Estimations of the trade restrictiveness of non-tariff measures for goods are taken from Kee

et al (2009). However, rather than being bilateral, these measures are only importer-specific,

and cannot represent the preferential access enjoyed by EU countries. To deal with this

limitation we adopt a dual strategy. First, we introduce exporter-importer variation during

aggregation of NTM trade restrictiveness indices as in Disdier et al. (2016), using reference

group weights to aggregate from the HS-6 level to the sector level considered in this study.

Second, we adjust the level of trade restrictiveness within the EU: we assume that between

EU countries, all the restrictiveness that could have been withdrawn in a potential EU-US trade

agreement (“actionable” measures) has already been removed, based on the estimates in

Berden et al. (2009). The resulting reduction in NTMs trade restrictiveness within the EU,

compared to NTMs related to extra-EU trade partners, is presented in Table B.3. In particular,

this approach results in NTMs in the agri-food sectors that are, on average, 53% less restrictive

within the EU than between EU and non-EU countries.

Table B.3: Reduction in intra-EU trade restrictiveness of NTMs

MIRAGE sector Sector from Berden et

al. (2009)

Reduction

(%)

Agriculture

Animal products, Beverages and Tobacco, Cattle, Cereals,

Dairy, Fiber crops, Fishing, Forestry, Oil seeds, Other Crops,

Other food, Red Meat, Rice, Sugar, Vegetable oils and fats,

Vegetables and fruits, Wheat, White Meat, Wool

Food & beverages 53.0

Industry

Energy, Minerals, Other Manufacturing All Industry 52.0

Transport equipment n.e.c., Vehicles and parts Automobile 48.0

Chemistry Chemicals 63.0

Electronic Electronics 41.0

Machinery Machinery 55.0

Paper Office equipment 52.0

Ferrous Metals, Metal products, Metals n.e.c. Steel 62.0

Textile Textiles 50.0

Wood Wood 60.0

Services

Public Services All Services 47.6

Communication Communication 70.0

Finance Financial 49.0

Insurance Insurance 52.0

Business Services, Trade Other business services 51.0

Other Services Personal, recreational

services,Construction 37.5

Transport Travel services 40.0

Source: Berden et al. (2009)


94


95

ANNEX C: ADDITIONAL TABLES

Table C.1: EU27 sector exports by destination and ranked by largest decrease in

exports towards the world, WTO scenario, 2030

Total World European Union (27) United Kingdom Rest of the World

Sector BAU

(USD mn) Var.

(USD mn) Var. (%)

BAU (USD mn)

Var. (USD mn)

Var. (%)

BAU (USD mn)

Var. (USD mn)

Var. (%)

BAU (USD mn)

Var. (USD mn)

Var. (%)

Total Agri-food

672,808 (8%)

-27,786 -4.1 395,860

(9%) + 3,878 + 1.0

54,389 (10%)

-33,714 -62.0 222,558

(6%) + 2,051 + 0.9

Other food 222,952

(33%) -10,529 -4.7

129,501 (33%)

+ 1,139 + 0.9 19,019 (35%)

-12,110 -63.7 74,433 (33%)

+ 442 + 0.6

White Meat 50,286

(7%) -5,276 -10.5

32,588 (8%)

+ 698 + 2.1 6,676 (12%)

-6,203 -92.9 11,022

(5%) + 229 + 2.1

Dairy 65,878 (10%)

-4,641 -7.0 41,954 (11%)

+ 430 + 1.0 5,207 (10%)

-4,921 -94.5 18,718

(8%) -150 -0.8


104,631 (16%)

-1,975 -1.9 48,550 (12%)

+ 183 + 0.4 8,931 (16%)

-2,421 -27.1 47,149 (21%)

+ 263 + 0.6


46,832 (7%)

-1,590 -3.4 31,961

(8%) + 336 + 1.1

4,768 (9%)

-2,128 -44.6 10,103

(5%) + 202 + 2.0

Red Meat 19,966

(3%) -1,249 -6.3

14,322 (4%)

+ 338 + 2.4 1,658 (3%)

-1,636 -98.7 3,986 (2%)

+ 49 + 1.2

Other Crops 39,425

(6%) -843 -2.1

21,867 (6%)

+ 351 + 1.6 3,137 (6%)

-1,586 -50.6 14,420

(6%) + 392 + 2.7

Vegetable oils and fats

26,082 (4%)

-740 -2.8 17,186

(4%) + 136 + 0.8

1,380 (3%)

-985 -71.4 7,516 (3%)

+ 110 + 1.5

Cattle 5,961 (1%)

-350 -5.9 3,331 (1%)

+ 4 + 0.1 679

(1%) -355 -52.3

1,951 (1%)

+ 1 + 0.1

Animal products

20,072 (3%)

-341 -1.7 10,856

(3%) -125 -1.2

707 (1%)

-286 -40.4 8,510 (4%)

+ 70 + 0.8

Sugar 8,169 (1%)

-189 -2.3 5,827 (1%)

+ 145 + 2.5 391

(1%) -364 -92.9

1,950 (1%)

+ 30 + 1.5

Rice 1,594 (0%)

-157 -9.9 1,153 (0%)

+ 15 + 1.3 195

(0%) -177 -90.9

245 (0%)

+ 5 + 2.1

Cereals 12,265

(2%) -131 -1.1

8,590 (2%)

-10 -0.1 389

(1%) -148 -38.1

3,285 (1%)

+ 27 + 0.8

Fishing 9,419 (1%)

-39 -0.4 7,374 (2%)

+ 64 + 0.9 561

(1%) -121 -21.6

1,484 (1%)

+ 17 + 1.2

Oil seeds 8,926 (1%)

-18 -0.2 7,180 (2%)

+ 29 + 0.4 139

(0%) -65 -46.9

1,607 (1%)

+ 18 + 1.1

Wool 751

(0%) + 5 + 0.7

70 (0%)

+ 1 + 1.3 51

(0%) -8 -15.1

631 (0%)

+ 12 + 1.9

Fiber crops 574

(0%) + 6 + 1.1

142 (0%)

+ 0 + 0.2 13

(0%) 0 -3.1

419 (0%)

+ 7 + 1.6

Forestry 14,154

(2%) + 120 + 0.8

6,255 (2%)

-19 -0.3 274

(1%) -43 -15.8

7,625 (3%)

+ 182 + 2.4

Wheat 14,871

(2%) + 151 + 1.0

7,155 (2%)

+ 162 + 2.3 213

(0%) -157 -73.5

7,503 (3%)

+ 145 + 1.9

Total Industry

5,970,967 (71%)

-122,484 -2.1 3,145,487

(74%) +58,182 + 1.8

378,051 (71%)

-207,897 -55.0 2,447,428

(69%) +27,231 + 1.1

Total Services

1,718,543 (21%)

-4,086 -0.2 719,211

(17%) + 2,873 + 0.4

97,946 (18%)

-20,093 -20.5 901,386

(25%) +13,134 + 1.5

Notes: Sectors are ranked by decreasing loss (in value) of total exports to the World. Levels are given in 2011 USD million and

percentages. For instance, Other food represents 33% of EU agri-food exports to the world, while EU agri-food exports to the world

represent 8% of total EU exports to the world. Variations in USD million and percentage points with respect to the BAU scenario.



96

Table C.2: EU27 subregions export to UK in Agri-food sectors: aggregate and three

sectors with the largest variations, 2030 BAU WTO WTO (Tariff only) WTO (Ireland NTM)

Country/Sector Level Var.

(USD mn.)

Var.

(%)

Var.

(USD mn.)

Var.

(%)

Var.

(USD mn.)

Var.

(%)

Netherlands

Total Agri-food 10,104 (23%)

-6,666 -66.0 -4,154 -41.1 -6,667 -66.0

White Meat 2,289 (23%)

-2,148 -93.9 -1,718 -75.1 -2,149 -93.9

Other food 2,854 (28%)

-1,832 -64.2 -919 -32.2 -1,832 -64.2

Other Crops 2,339 (23%)

-1,207 -51.6 -527 -22.5 -1,207 -51.6

Ireland


-6,476 -70.8 -4,497 -49.2 -6,436 -70.4


-1,462 -61.5 -423 -17.8 -1,465 -61.6

Dairy 1,529 (17%)

-1,455 -95.2 -1,271 -83.1 -1,460 -95.5

Red Meat 1,271 (14%)

-1,255 -98.8 -1,235 -97.2 -1,254 -98.7

France


-4,717 -51.4 -2,913 -31.7 -4,720 -51.4


-1,860 -69.0 -978 -36.3 -1,860 -69.1

Dairy 1,169 (13%)

-1,102 -94.2 -924 -79.0 -1,102 -94.2

Beverages and Tobacco 3,430 (37%)

-553 -16.1 -257 -7.5 -555 -16.2

Rest of EU27


-3,322 -70.9 -2,319 -49.5 -3,323 -70.9


-1,082 -63.0 -557 -32.5 -1,082 -63.1

White Meat 1,071 (23%)

-979 -91.5 -798 -74.6 -979 -91.5

Dairy 817

(17%) -772 -94.5 -666 -81.6 -772 -94.5

Germany


-3,297 -62.9 -1,846 -35.2 -3,299 -63.0


-1,702 -59.9 -709 -25.0 -1,703 -60.0

White Meat 533

(10%) -486 -91.1 -393 -73.7 -486 -91.1

Beverages and Tobacco 802

(15%) -378 -47.0 -248 -31.0 -378 -47.1

Italy


-2,633 -55.9 -1,532 -32.5 -2,635 -56.0


-1,250 -69.4 -589 -32.7 -1,251 -69.5

Dairy 349

(7%) -329 -94.2 -275 -78.8 -329 -94.2


97

BAU WTO WTO (Tariff only) WTO (Ireland NTM)

Country/Sector Level Var.

(USD mn.) Var. (%)

Var.

(USD mn.) Var. (%)

Var.

(USD mn.) Var. (%)

White Meat 319

(7%) -293 -91.9 -233 -73.1 -293 -91.9

Belgium and Luxembourg


-2,619 -66.2 -1,417 -35.8 -2,619 -66.2


-1,371 -62.8 -616 -28.2 -1,372 -62.9

Dairy 361

(9%) -339 -94.1 -288 -79.9 -340 -94.1

White Meat 282

(7%) -255 -90.3 -192 -68.1 -255 -90.3

Spain


-2,216 -51.1 -1,475 -34.0 -2,218 -51.2

Vegetables and fruits 1,664 (38%)

-742 -44.6 -459 -27.6 -742 -44.6


-702 -60.8 -388 -33.6 -702 -60.8

Vegetable oils and fats 230

(5%) -214 -92.9 -198 -86.1 -214 -92.9

Poland


-1,200 -68.7 -733 -42.0 -1,200 -68.7

Other food 960

(55%) -590 -61.5 -270 -28.1 -591 -61.5

White Meat 353

(20%) -332 -94.1 -256 -72.7 -332 -94.1

Dairy 111

(6%) -105 -94.8 -90 -81.1 -105 -94.8

Sweden

Total Agri-food 793

(4%) -288 -36.3 -135 -17.0 -288 -36.4

Other food 259

(33%) -145 -56.0 -55 -21.4 -145 -56.0


(22%) -54 -30.8 -22 -12.5 -54 -30.8

Fishing 239

(30%) -24 -10.0 -13 -5.5 -24 -10.1

Portugal

Total Agri-food 498

(8%) -281 -56.5 -167 -33.5 -281 -56.5

Other food 182

(37%) -114 -62.6 -54 -29.5 -114 -62.6

White Meat 63

(13%) -59 -93.3 -44 -70.1 -59 -93.3


(29%) -52 -35.4 -37 -25.0 -52 -35.5

Note: Levels are given in million 2011 USD, Variations in percentage points. BAU percentages for Total Agri-food

are percentages of total exports to the UK, while for sectors it represents the percentage within agri-food exports.

Source: Authors’ calculations using MIRAGE-e.


98

Table C.3: Agri-food value-added in EU27 regions, in the WTO scenario: aggregate,

five most impacted sectors and decomposition of variation, 2030

BAU WTO VA decomposition

Country/Sector Level Var (USD

mn.) Var (%)

Dom. demand

Exp. to UK

Exp. to EU

Exp. to Row

Iceberg cost

European Union (27)

Total Agri-food 736,581 -5,597 -0.8 + 295 -6,795 + 908 +616 -621

Other food 254,129 -2,536 -1.0 + 213 -2,586 + 236 + 77 -475


67,669 -750 -1.1 + 75 -1,157 + 179 + 85 + 67

White Meat 34,393 -705 -2.0 + 92 -755 + 90 + 32 -164

Dairy 42,993 -552 -1.3 + 32 -501 + 71 + 7 -159

Animal products 48,103 -379 -0.8 -315 -56 -36 + 25 + 3

Ireland

Total Agri-food 10,596 -1,724 -16.3 -376 -851 -101 -100 -296

Other food 5,550 -732 -13.2 -133 -319 -49 -61 -170

Dairy 478 -216 -45.3 -2 -95 -30 -24 -65

Cattle 720 -184 -25.6 -133 -45 -2 -2 -3

White Meat 273 -159 -58.1 + 3 -110 -5 -6 -40

Red Meat 385 -141 -36.6 + 9 -111 -17 -2 -21

Netherlands

Total Agri-food 46,458 -1,269 -2.7 -189 -1,374 + 250 +121 -77

Other food 17,980 -456 -2.5 -90 -384 + 49 + 19 -51

White Meat 1,710 -270 -15.8 + 1 -234 + 24 + 2 -62

Other Crops 8,925 -223 -2.5 + 4 -405 + 94 + 66 + 18


4,133 -131 -3.2 + 1 -195 + 35 + 15 + 13


5,527 -89 -1.6 -19 -85 + 10 + 4 + 1

Rest of EU27

Total Agri-food 156,621 -557 -0.4 -28 -709 + 117 +117 -55

Other food 42,551 -149 -0.4 + 78 -270 + 44 + 20 -22

White Meat 7,772 -143 -1.8 + 15 -161 + 17 + 12 -25

Dairy 10,122 -141 -1.4 -13 -119 + 17 + 7 -33

Animal products 13,106 -87 -0.7 -101 -3 -6 + 16 + 7

Forestry 15,109 -36 -0.2 -56 -4 -9 + 30 + 4

Italy

Total Agri-food 86,429 -509 -0.6 -17 -561 + 61 + 65 -57

Other food 26,009 -226 -0.9 + 0 -206 + 18 + 12 -50

Vegetables and

fruits 16,563 -143 -0.9 + 4 -175 + 11 + 13 + 3

Dairy 4,621 -40 -0.9 -1 -38 + 8 + 2 -11

White Meat 2,966 -35 -1.2 -2 -32 + 4 + 1 -6

Animal products 4,961 -27 -0.5 -26 -1 -2 + 1 + 0


99



mn.) Var (%)

Dom. demand

Exp. to UK

Exp. to EU

Exp. to Row

Iceberg cost

France

Total Agri-food 149,002 -406 -0.3 + 453 -1,103 + 149 +179 -84

Other food 61,387 -371 -0.6 + 129 -483 + 46 + 33 -97

Dairy 9,421 -108 -1.1 + 18 -122 + 23 + 8 -35

Cattle 5,960 + 79 + 1.3 + 87 -11 + 2 + 1 + 0

Wheat 4,768 + 79 + 1.7 + 11 -14 + 30 + 51 + 1

Red Meat 6,168 + 129 + 2.1 + 123 -8 + 11 + 1 + 2

Germany

Total Agri-food 94,838 -372 -0.4 + 149 -674 + 104 + 88 -39

Other food 42,124 -270 -0.6 + 101 -411 + 54 + 23 -38

Animal products 6,484 -49 -0.8 -24 -10 -15 + 3 -3


9,578 -43 -0.5 + 3 -55 + 4 + 4 + 1


4,012 -27 -0.7 + 3 -44 + 7 + 3 + 4

White Meat 3,690 -26 -0.7 + 18 -55 + 14 + 4 -7

Spain

Total Agri-food 81,067 -336 -0.4 + 203 -744 + 134 + 57 + 14


11,313 -320 -2.8 + 29 -483 + 87 + 23 + 24

Other food 22,135 -68 -0.3 + 42 -123 + 12 + 9 -9

Rice 521 -23 -4.3 -1 -16 + 1 + 0 -6

Sugar 593 + 28 + 4.8 + 27 -1 + 3 -1 -0

Wheat 1,485 + 45 + 3.0 + 40 -3 + 7 + 1 + 0

Belgium and Luxembourg

Total Agri-food 21,746 -230 -1.1 + 34 -383 + 101 + 37 -19

Other food 7,891 -172 -2.2 + 7 -185 + 25 + 7 -25


4,856 -38 -0.8 -4 -48 + 7 + 4 + 3

Animal products 998 -18 -1.8 -11 -4 -3 + 1 -1

White Meat 675 -17 -2.5 + 2 -28 + 11 + 2 -3

Red Meat 491 + 20 + 4.1 + 14 -3 + 8 + 0 + 1

Poland

Total Agri-food 55,551 -147 -0.3 + 33 -256 + 62 + 28 -14

Other food 18,474 -90 -0.5 + 28 -142 + 27 + 8 -11

White Meat 4,021 -21 -0.5 + 25 -45 + 8 + 3 -11

Vegetables and

fruits 4,963 -14 -0.3 -1 -22 -0 + 5 + 5

Animal products 5,205 -13 -0.2 -11 -1 -2 + 1 + 0

Forestry 2,721 -12 -0.4 -14 -0 + 2 + 0 + 0

Portugal

Total Agri-food 13,011 -31 -0.2 + 18 -69 + 11 + 9 -0


100



mn.) Var (%)

Dom. demand

Exp. to UK

Exp. to EU

Exp. to Row

Iceberg cost

Other food 3,934 -11 -0.3 + 13 -26 + 3 + 2 -3

White Meat 494 -10 -2.0 + 0 -9 + 1 + 0 -2


1,610 -10 -0.6 + 1 -15 + 2 + 1 + 1


2,137 -6 -0.3 + 3 -14 + 2 + 1 + 2

Animal products 672 -6 -0.9 -6 -0 -0 + 0 + 0

Sweden

Total Agri-food 21,262 -16 -0.1 + 14 -71 + 21 + 14 + 7

Forestry 7,589 -34 -0.5 -44 -2 + 4 + 6 + 2


1,774 -4 -0.2 + 5 -15 + 1 + 2 + 3

Dairy 831 -2 -0.3 + 1 -3 + 0 + 0 -1

Red Meat 501 + 6 + 1.2 + 5 -0 + 0 + 0 + 0

Other food 6,094 + 12 + 0.2 + 36 -36 + 7 + 4 + 0

Note: Levels and decomposition are given in million USD, Variations in percentage points.

Source: Authors’ calculations using MIRAGE-e.

Table C.4: Gross Domestic Product (volume) and variation in 2030

BAU WTO WTO (Tariff

only)

WTO (Ireland

NTM)

Region Level Var. ($

bn.)

Var.

(%)

Var. ($

bn.)

Var.

(%)

Var. ($

bn.)

Var.

(%)

EU27 20,009 -63.4 -0.3 -3.0 -0.0 -87.7 -0.4

Germany 4,168 -11.4 -0.3 -0.8 -0.0 -12.0 -0.3

France 3,821 -9.1 -0.2 -0.5 -0.0 -9.7 -0.3

Rest of EU27 3,539 -7.4 -0.2 -0.1 -0.0 -8.1 -0.2

Italy 2,367 -3.7 -0.2 -0.1 -0.0 -3.9 -0.2

Spain 1,897 -3.4 -0.2 + 0 + 0.0 -3.6 -0.2

Netherlands 1,055 -5.7 -0.5 -0.8 -0.1 -6.0 -0.6

Poland 1,004 -2.1 -0.2 -0.1 -0.0 -2.2 -0.2

Sweden 762 -2.8 -0.4 -0.2 -0.0 -3.0 -0.4

Belgium and

Luxembourg 746 -5.1 -0.7 -0.2 -0.0 -5.5 -0.7

Ireland 349 -12.0 -3.4 -0.3 -0.1 -32.8 -9.4

Portugal 300 -0.8 -0.3 0.0 -0.0 -0.9 -0.3

UK 3,627 -87.7 -2.4 -11.5 -0.3 -87.6 -2.4

Rest of the World 102,474 + 14 + 0.0 + 3 + 0.0 + 17 + 0.0

Note: Levels are given in billion 2011 USD, Variations in billion 2011 USD and percentage points.



101

ANNEX D: ADDITIONAL TABLES – HS6 DETAILS

Table D.1: Number of HS6 products, by GTAP sector

GTAP sectors Number of HS6

products

Animal products n.e.c. (oap) 48

Beverages and tobacco products (b_t) 31

Bovine, cattle, sheep, and goats horses (ctl) 8

Bovine meat products (cmt) 30

Cereal grains n.e.c. (gro) 10

Crops n.e.c. (ocr) 63

Dairy products (mil) 24

Fishing (fsh) 41

Food products n.e.c. (ofd) 248

Forestry (frs) 25

Meat products n.e.c .(omt) 43

Oil seeds (osd) 16

Paddy Rice (pdr) 2

Plant based fibers (pfb) 8

Processed rice (pcr) 2

Sugar (sgr) 7

Sugar cane and sugar beet (c_b) 2

Vegetable oils and fats (vol) 47

Vegetables, fruit and nuts (v_f) 89

Wheat (wht) 2

Wool, silk, worm cocoons (wol) 6

Sources: GTAP, United Nations’ HS6 classification (revision 1996), Authors’ calculations.


102

Table D.2: EU27 imports, HS6 level (1/2)

GTAP HS6 LABEL MFN IMPORTS FROM UK

(1)

IMPORTS FROM

ROW (2) %

MAIN IMPORTER FROM UK

VALUE OF

IMPORTS

Food

products

n.e.c.

230910 Dog or cat food (retail)

37.9 364 5,593 7 Germany 78

230990

Animal feed

preparations n.e.s.

34.3 370 5,563 7 Ireland 163

190410

Cereal foods obtained by

swelling,

roasting of cereal

19.2 384 1,695 23 Ireland 132

110100 Wheat or meslin flour

44.9 104 983 11 Ireland 78

190590

Communion wafers, rice paper, bakers wares n.e.s.

5.5 524 7,814 7 Ireland 283

Dairy products

040120

Milk not concentrated

nor sweetened 1-6% fat

47.6 244 3,868 6 Ireland 228

040690

Cheese except fresh, grated, processed or blue-veined

36.7 298 11,291 3 Ireland 86

040610

Fresh cheese, unfermented whey cheese, curd

63.4 147 3,385 4 Ireland 63

040510 Butter 49.1 98 2,818 3 France 26

040221

Milk and cream powder unsweetened >

1.5% fat

48.9 92 836 11 Belgium 61

Bovine meat

products

020130 Bovine cuts boneless, fresh or chilled

68.6 311 5,681 5 Ireland 90

020410

Lamb carcasses and half carcasses, fresh or chilled

48.0 342 620 55 France 222

020230

Bovine cuts

boneless, frozen

84.6 66 1,823 4 Ireland 16

020110 Bovine carcasses and

59.9 77 1,771 4 Netherlands 40


103

half carcasses,

fresh or chilled

020120 Bovine cuts bone in, fresh or chilled

60.6 72 3,238 2 Netherlands 30

Source: MAcMap-HS6 (2013) and BACI (Average flow 2013-2014-2015), Trade data expresses in millions of USD,

MFN tariffs are expressed in percentage and aggregated MAcMap-HS6’s weighting schemes. Authors’ calculations.

Table D.3: EU27 imports, HS6 level (2/2)

GTAP HS6 LABEL MFN IMPORTS FROM UK

(1)

IMPORTS FROM

ROW (2)

% MAIN

IMPORTER

FROM UK

VALUE

OF

IMPORTS

Meat products n.e.c.

020714 Fowls, cuts &

offal, frozen 44.9 155 2,147 7 Ireland 37

020319 Swine cuts, fresh or chilled, n.e.s.

26.8 151 5,614 3 Poland 77

020713 Fowls, cuts & offal, fresh or chilled

20.7 129 2,556 5 Ireland 61

021019

Swine meat,

salted/dried/smo

ked not ham/shoulder/belly

23.6 48 1,246 4 Ireland 43

160250

Bovine meat, offal n.e.s., not livers, prepared/preserved

34.8 31 668 5 Ireland 19

Beverages and

tobacco products

240310

Cigarette or pipe tobacco and tobacco substitute mixes

74.9 111 1,920 6 Germany 18

240220 Cigarettes containing tobacco

33.8 162 8,568 2 Ireland 31

220710 Undenatured ethyl alcohol >

80% by volume

21.2 223 2,568 9 Netherlands 67

220210

Beverage waters, sweetened or

flavoured

9.6 297 3,267 9 Ireland 210

220290

Non-alcoholic

beverages n.e.s., except fruit, vegetable

juices

14.4 101 2,784 4 Ireland 32




104

Table D.4: EU27 exports, HS6 level (1/2)

GTAP HS6 LABEL MFN EXPORTS

TO UK (1)

EXPORTS TO ROW

(2) %

MAIN EXPORTER

TO UK

VALUE OF

EXPORTS

Food products

n.e.c.

230910 Dog or cat food (retail)

37.9 760 6,457 12 France 190

230990 Animal feed preparations n.e.s.

34.3 388 7,718 5 France 71

190590 Communion wafers, rice paper, bakers

wares n.e.s.

5.5 1,597 10,381 15 Germany 374

200919 Orange juice, not fermented, spirited, or frozen

24.9 351 1,650 21 Belgium 194

170230 Glucose, glucose syrup < 20% fructose

64.0 119 1,381 9 Belgium 54

Dairy products

040690

Cheese except fresh, grated, processed or blue-veined

36.7 1,150 14,745 8 Ireland 426

040610 Fresh cheese, unfermented whey cheese, curd

63.4 592 4,386 13 France 167

040510 Butter 49.1 311 3,578 9 Ireland 163

040390 Buttermilk, curdled milk, cream, kephir, etc.

45.3 334 1,338 25 France 164

040630 Cheese processed, not grated or powdered

41.0 329 1,869 18 Ireland 143

Meat products n.e.c.

021019

Swine meat,

salted/dried/smoked not ham/shoulder/belly

23.6 855 2,371 36 Denmark 320

020714 Fowls, cuts & offal, frozen

44.9 430 2,816 15 Netherlands 238

020319 Swine cuts, fresh or chilled, n.e.s.

26.8 655 6,419 10 Germany 214

020713 Fowls, cuts & offal, fresh or chilled

20.7 756 3,247 23 Netherlands 455

160100 Sausages, similar products of meat,

meat offal & blood

26.3 556 3,281 17 Germany 173




105

Table D.5: EU27 exports, HS6 level (2/2)

GTAP HS6 LABEL MFN EXPORTS

TO UK (1)

EXPORTS TO ROW

(2) %

MAIN EXPORTER

TO UK

VALUE OF

EXPORTS

Beverages and

tobacco products

240220 Cigarettes containing tobacco

33.8 302 11,840 3 Czech

Republic 100

220421

Grape wines

n.e.s., fortified wine or must, pack < 2l

4.3 2,310 16,317 14 France 1,038

220290

Non-alcoholic beverages n.e.s., except fruit, vegetable juices

14.4 624 3,957 16 Netherlands 256

220710

Undenatured ethyl alcohol > 80% by volume

21.2 340 2,326 15 Netherlands 145

240310

Cigarette or pipe tobacco and tobacco substitute mixes

74.9 88 2,473 4 Netherlands 53

Vegetables, fruit and nuts

070200 Tomatoes, fresh or chilled

21.2 572 4,261 13 Netherlands 274

070700

Cucumbers and gherkins, fresh or chilled

28.1 178 1,351 13 Netherlands 98

070951 Mushrooms, fresh or chilled

10.4 336 1,256 27 Ireland 186

080520

Mandarin, clementine & citrus hybrids, fresh or dried

16.0 199 2,147 9 Spain 176

070410

Cauliflowers and headed

broccoli, fresh or chilled

13.6 188 695 27 Spain 149




106





Possible transitional arrangements

related to agriculture in the light of the

future EU - UK relationship:

institutional issues

STUDY

Abstract

There is the potential for severe disruption of agri-food trade between the

UK and the EU27 as the UK prepares to leave the EU. This study reviews

the additional trade costs that might arise and how they might be avoided

under alternative future trade arrangements. The role of a transitional

period in order to avoid a ‘cliff-edge’ for trade is examined. Options under

the Common Agricultural Policy to address the negative consequences of

Brexit for agricultural markets are discussed.

IP/B/AGRI/CEI/2015-070/C5/SC2 October 2017

PE 602.009 EN


Rural Development.

AUTHOR

Alan Matthews




LINGUISTIC VERSIONS

Original: EN

ABOUT THE PUBLISHER






Matthews, A., 2017, Research for AGRI Committee – Possible transitional arrangements

related to agriculture in the light of the future EU - UK relationship: institutional issues,

European Parliament, Policy Department for Structural and Cohesion Policies, Brussels


Matthews, A. (2017)

DISCLAIMER






Transitional arrangements related to agriculture in light of the future EU - UK relationship: institutional issues

109

BRIEF PROFESSIONAL DESCRIPTION

Alan Matthews is Professor Emeritus of European Agricultural Policy at

Trinity College, Dublin, Ireland. His research interests include the areas of

agricultural policy and modelling, applied trade policy and WTO rules

affecting agriculture and food security. He has published widely and has

undertaken commissioned studies for the European Commission, the

European Parliament, the Food and Agricultural Organisation of the United

Nations and the OECD in these areas. He is a past-President of the

European Association of Agricultural Economists and is currently a

member of Ireland’s Climate Change Advisory Council. He is a regular

contributor to the blog capreform.eu on issues relating to the EU’s

Common Agricultural Policy.


110


111

CONTENTS


LIST OF TABLES 115

LIST OF FIGURES 115


1. INTRODUCTION 121

1.1. Purpose of the study 121

1.2. Article 50 124

1.3. The UK position on the long-term trade relationship 124

1.4. The EU27 position on the long-term trade relationship 127

2. THE ISSUES AT STAKE FOR AGRI-FOOD TRADE 131

2.1. Trade terms in the ‘no deal’ scenario 132

2.2. Specific issues facing Ireland 140

2.3. Trade arrangements to avoid or mitigate trade costs 141

2.4. Models of the future relationship 151

2.5. The WTO dimension of UK withdrawal 158

3. AVOIDING A ‘CLIFF EDGE’ FOR AGRI-FOOD TRADE 163

3.1. The need for transition arrangements 164

3.2. Views of the parties on transition 167

3.3. Extending the date for Brexit beyond 29 March 2019 174

3.4. Extending the EU acquis to a non-member 175

3.5. EFTA/EEA membership as an interim arrangement 177

3.6. A temporary customs union as an interim arrangement 179

3.7. A free trade agreement as an interim arrangement 181

3.8. Rescheduling the phasing of Article 50 negotiations 181

4. PROTECTING AGRICULTURAL INTERESTS FOLLOWING BREXIT 185

4.1. Support in the case of market disturbance 186

4.2. Support for adjustment 188

4.3. Strengthened promotion policy 189

4.4. Improved access to third country markets 191

4.5. TRQs for UK-EU27 trade 192

REFERENCES 195

ANNEX 1. EXAMPLES OF CUSTOMS CLEARANCE COSTS 197


112


113


ACAA Agreement on Conformity Assessment and Acceptance of Industrial

Products

AEO Authorised Economic Operator

AEOC Authorised Economic Operator for customs simplification

AEOS Authorised Economic Operator for security and safety

AGRI Agriculture and Rural Development Committee

AGRIFISH Agricultural and Fisheries Council

AVE Ad Valorem Equivalent

BCP Border Control Point

BIP Border Inspection Point

BTAMS Bound Total Aggregate Measurement of Support

CAP Common Agricultural Policy

CDS Customs Declaration Service

CET Common External Tariff

CFP Common Fisheries Policy

CHED Common Health Entry Document

CITES Convention on International Trade in Endangered Species of Wild

Fauna and Flora

CJEU Court of Justice of the European Union

DPE Designated Point of Entry

CETA EU-Canada Comprehensive Economic and Trade Agreement

CVED Common Veterinary Entry Document

DCFTA Deep and Comprehensive Free Trade Area

EAFRD European Fund for Rural Development

ECMT European Conference of Ministers for Transport

EEA European Economic Area

EGF European Globalisation Fund

EIB European Investment Bank

EU European Union

FTA Free Trade Area

GATT General Agreement on Tariffs and Trade

HACCP Hazard Analysis and Critical Control Point

HGV Heavy Goods Vehicle


114

HMRC Her Majesty’s Revenue and Customs

IMSOC Integrated Management System for Official Controls

MFF Multi-annual Financial Framework

MFN Most Favoured Nation

MRA Mutual Recognition Agreement

NAO National Audit Office

OECD Organisation for Economic Co-operation and Development

PEM Pan-Euro-Mediterranean preferential rules of origin

PSE Producer Support Estimate

RDP Rural Development Programme

ROOs Rules of Origin

SAD Single Administrative Document

SPS Sanitary and Phytosanitary Standards

TARIC Integrated Tariff of the European Union

TEU Treaty of the European Union

TFEU Treaty on the Functioning of the European Union

TIR Transports Internationaux Routiers, International Road Transport

TRQ Tariff Rate Quota

UCC Union Customs Code

UK United Kingdom

WTO World Trade Organisation


115

LIST OF TABLES

Table 1

Timeline of events around the UK withdrawal from the EU 130

Table 2

EU's applied MFN tariff summary, 2016 133

Table 3

Examples of customs and other controls in international trade 136

Table 4

Topics and actions for support in the 2017 Work Programme for information and

promotion measures for agricultural products 190

LIST OF FIGURES

Figure 1

Impact of UK referendum result on value of sterling 123

Figure 2

Gap between EU and world market prices 135

Figure 3

Alternative post-Brexit trade scenarios beyond WTO terms 142

Figure 4

Main elements of different EU trade arrangements 151

Figure 5

Annual lorry traffic and EU share of trade for selected major UK ports

in 2015 166


116


117

EXECUTIVE SUMMARY

Introduction

On 29 March 2017 the United Kingdom (UK) notified the President of the European Council of

its intention to withdraw from the European Union (EU). Article 50 of the Treaty of the

European Union sets out the procedures to be followed when a Member State wishes to leave

the EU.

The UK has set out its ambition for a bold and ambitious free trade agreement with the EU,

while respecting its four ‘red lines’ of ending the jurisdiction of the European Court of Justice,

controlling immigration from the EU, ending most contributions to the EU budget, and being

able to strike trade deals with third countries.

The EU has set out its position through the European Council (Art. 50) guidelines, the Council’s

negotiating directives and resolutions of the European Parliament, emphasising that a non-

member of the Union, that does not live up to the same obligations as a member, cannot have

the same rights and enjoy the same benefits as a member. It also set out a phased approach

to the withdrawal negotiations in which progress must be made on three key withdrawal issues

before it will give a mandate to move to the second phase of negotiations on the future

relationship.

Withdrawal negotiations began on 22 June 2017 but the European Council (Art. 50) decided

on 20 October 2017 that insufficient progress had been made in the first phase of the

negotiations to justify preparing a mandate for the second phase. However, it invited the

Council (Art. 50) and the Union negotiator to start internal preparatory discussions in relation

to the framework for the future relationship and on transitional arrangements, with a view to

being able to move to the second phase of the negotiations in December 2017.

The issues at stake for agri-food trade

In the absence of a future trade agreement tariffs would be re-imposed on bilateral UK-EU27

trade. The tariffs applicable to UK exports would be those in the EU’s Common External Tariff

(CET). The tariffs applicable to EU exports are not yet known, but at least initially may be kept

at the CET level.

Even apart from the imposition of tariffs, the UK would be a less attractive market for EU

exporters because exporters would lose the preferential trade transfers they currently earn on

sales to the UK market. These represent the difference between the price paid by UK

consumers for EU27 exports behind the EU tariff wall and the price EU exporters would receive

if the products were sold instead at world market prices.

Customs clearance costs would be an additional cost for firms exporting or importing from the

UK. These costs would be increased for certain agricultural and food products because of the

need for additional border checks to ensure compliance with EU27 food safety, plant and

animal health regulations.

In the absence of an agreement covering road transport services, hauliers travelling between

the UK and EU27 could face additional costs because of the need to secure licences with

individual Member States.

Ireland faces particular issues in the event of a ‘hard’ Brexit because of the importance of the

UK land bridge for the transport of agri-food products to and from the EU27, and because

transport from one location in Ireland to another may in some instances need to travel through

Northern Ireland.


118

A range of potential trade arrangements are available which address one or more of these

potential trade costs. However, the current ability to trade frictionlessly between the UK and

the EU27 is due to the UK’s EU membership and can only be maintained if the UK were to

remain a member of the EU.

There are a number of ‘models’ for the future long-term trade relationship between the UK

and the EU27. These include the ‘Canada’, ‘Turkey’, ‘Ukraine’, ‘Swiss’ and ‘Norway’ models.

The UK government has ruled out the Canada, Turkey and Norway models, but it has not

defined where it might like to end up between the Ukraine and Swiss models. The EU27, for

its part, is unlikely to make the Swiss model available because of its institutional deficiencies,

though its attitude to the Ukraine model has not been clarified. The Ukraine model is

implemented through an Association Agreement with the EU which has been specifically

endorsed by the European Parliament.

Avoiding a ‘cliff-edge’ for agri-food trade

Even if the UK and the EU27 were to conclude an agreement on the withdrawal conditions and

on the nature of their future relationship by 29 March 2019, traders face a ‘cliff-edge’ situation

because of the lack of preparedness of customs administrations and other relevant authorities

on both sides to manage border controls; the lack of knowledge on the part of the large

number of new businesses that will face the need to seek customs clearance for their exports

and imports; and the almost certain congestion at major ports of entry and exit because of

the extra time required for these controls.

Both parties have indicated a willingness to consider a transition period. In this study, the

purpose of a transitional period would be to maintain the trade status quo between the UK

and the EU27 until the arrangements for the future trade relationship were put in place. Both

parties have indicated their ‘red lines’ regarding matters on which they would insist during a

transition period. There is little clarity, however, as to how extensive such a transition

arrangement might be and what laws and regulations it would have to cover to ensure that

trade, including trade in agri-food products, would continue on the same basis as it does today.

One option is that the UK would remain a Member State of the EU for a further time-limited

period, either by including a withdrawal date later than 29 March 2019 in the withdrawal

agreement or by unanimously agreeing to extend the Art.50 TEU deadline for the negotiations.

Another option is that the UK would agree to bind itself to following the relevant Union acquis

as a non-Member State for a time-limited period after 29 March 2019 while also joining a

temporary customs union for this period. Negotiating what would effectively be a complete if

temporary trade agreement at the same time as the parties are negotiating a withdrawal

agreement and the framework for their future relations may be more than can be achieved in

the remaining time available.

Fall-back positions which would avoid some but not all of the additional trade costs, such as a

temporary customs union on its own or just a free trade agreement in goods, should be

considered if it proves impossible to reach an agreement in which the UK remains bound by

the relevant Union acquis in the time available.

Following the mandate at the October 2017 meeting of the European Council (Art.50), the

General Council (Art. 50) and the Union negotiator should seek to rapidly progress preparatory

work particularly on models of transitional arrangements. This should help to clarify what

might be the minimum requirements to ensure that trade can continue to take place with the

UK as it does today for the duration of the transition period, and what the appropriate balance


119

of rights and obligations might be during this period. Specific issues for consideration will

include whether UK membership of the CAP and the Common Fisheries Policy (CFP) will be

deemed necessary as a prerequisite for continued free trade in agricultural and fishery

products during the transition period, as well as arrangements to ensure the continued

protection of Geographical Indications in the UK.

Protecting agricultural interests following Brexit

The EU has gained considerable experience in recent years in the management of adverse

shocks to agricultural markets which can be drawn upon in designing possible responses to a

negative Brexit shock. They include the use of safety-net intervention; targeted aid;

mobilisation of the crisis reserve; advancing direct payments; making use of the income

stabilisation tool; permitting flexibility in state aids; and facilitating supply management.

Farmers and food businesses in the EU27 will need such support to adjust to the structural

consequences of a ‘hard’ Brexit. This might include the provision of adjustment assistance;

greater use of financial instruments; a strengthened promotion policy; and improved access

to third country markets.

A specific market access concern is how UK TRQs will make provision for traditional EU27

export flows, and vice versa for EU27 TRQs. Merely splitting the EU TRQs does not go far

enough to protect the interests of EU producers to access the UK market in the event of a

‘hard’ Brexit.


120


121

1. INTRODUCTION

KEY FINDINGS

On 29 March 2017 the UK notified the President of the European Council of its

intention to withdraw from the European Union (EU).

Article 50 of the Treaty of the European Union sets out the procedures to be followed

when a Member State wishes to leave the EU.

The UK has set out its ambition for a bold and ambitious free trade agreement

with the EU, while respecting its four ‘red lines’ of ending the jurisdiction of the

European Court of Justice, controlling immigration from the EU, ending most

contributions to the EU budget, and being able to strike trade deals with third

countries.

The EU has set out its position through the European Council (Art. 50) guidelines,

the Council’s negotiating directives and resolutions of the European Parliament,

emphasising that a non-member of the Union, that does not live up to the

same obligations as a member, cannot have the same rights and enjoy the

same benefits as a member. It also set out a phased approach to the withdrawal

negotiations in which progress must be made on three key withdrawal issues before

it will give a mandate to move to the second phase of negotiations on the future

relationship.

Withdrawal negotiations began on 22 June 2017 but the European Council (Art. 50)

decided on 20 October 2017 that insufficient progress had been made in the first

phase of the negotiations to justify preparing a mandate for the second phase.

However, it invited the Council (Art. 50) and the Union negotiator to start internal

preparatory discussions in relation to the framework for the future relationship

and on transitional arrangements, with a view to being able to move to the second

phase of the negotiations in December 2017.

The United Kingdom (UK) Prime Minister announced in a letter to the European Council

President Donald Tusk dated 29 March 2017 that the UK intended to withdraw from the

European Union (EU) in accordance with Article 50(2) of the Treaty on European Union

(TEU) (May 2017b). 0F

72 This letter followed a referendum among the UK electorate on 23 June

2016 on the question “Should the United Kingdom remain a member of the European Union

or leave the European Union?” with the possible responses being either “Remain a member of

the European Union” or “Leave the European Union”. The Leave response was supported by a

narrow majority of 52% compared to 48% for Remain. The Prime Minister’s letter did not

specify a specific date for this withdrawal. However, in her speech delivered in Florence on 22

September 2017 she made clear that “The United Kingdom will cease to be a member of the

European Union on 29th March 2019” (May 2017c).

1.1. Purpose of the study

This decision of the UK to exit the EU (Brexit) threatens to unwind over four decades of

increasing inter-dependence, including trade inter-dependence, within the framework of the

EU. The extent of the possible disruption to existing trade flows will depend, in part, on the

72 Throughout this report, the term European Union or EU is used to refer to the existing Union of 28 Member States.

The term EU27 is used to refer to the Union following the departure of the United Kingdom.


122

nature of any future trade relationship that the UK and the EU27 may agree. Negotiating this

relationship is likely to take time and may not be in place before 29 March 2019 which is the

end of the two-year time limit specified in Art 50 TEU when withdrawal must take place if

there is no agreement on an alternative date. 1F

73 This has given rise to discussion about a

possible transition period, or implementation period, which would preserve much of

the existing Union rules which govern internal trade while applying them to a non-EU

state until the future relationship is ready to take effect. Various legal scholars have put

forward ideas on how this might be achieved.

There remains the possibility that the UK and the EU27 will fail to conclude a withdrawal

agreement within the two-year time limit specified in Article 50 TEU. The result would be a

disorderly withdrawal in which future trade relations can best be described as a

‘hard’ Brexit. The withdrawal of the UK from the EU without a trade arrangement in place

would lead to huge disruption to UK-EU27 agri-food trade. In 2016, the EU27 exported agri-

food products worth €40.3 billion to the UK, while the EU27 imported agri-food products to

the value of €16.8 billion from the UK. 2F

74 Within the single market and Customs Union, 3F

75 this

trade takes place seamlessly and without frictions; for example, it allows just-in-time

deliveries to supermarkets or to plants for further processing in either party from suppliers in

the other party. This trade would be utterly disrupted by a ‘hard’ Brexit, for three reasons.

The first reason is that additional trade costs would apply under a ‘hard’ Brexit scenario

which are described in detail in Chapter 2. They include the levying of tariffs, the costs of

customs clearance, and the costs of demonstrating compliance with the other party’s

regulatory standards. These costs would bear particularly heavily on the agri-food sector

because of the generally higher level of agricultural tariffs and the greater need for physical

checks when food, and particularly animal products, cross frontiers.

The second reason is the lack of preparedness and the potential for huge disruption on

both sides of the UK and EU27 border in a ‘hard’ Brexit scenario. This scenario would require

the updating of customs computer systems, the provision of parking space at ports to

accommodate the additional delays expected when clearing customs, expansion of the

laboratory and other facilities needed at entry points to check goods for compliance with

regulatory standards, the recruitment of additional staff to cope with the expected dramatic

increase in the workload of border control officials once UK-EU27 trade became ‘external’

trade, and considerable investment in training the hundreds of thousands of new businesses

which would now be involved in extra-EU trade. While businesses would learn in time to cope

with many of the additional trade costs that would follow from UK exit from the EU, the

requirement to adapt to sudden changes as well as the lack of readiness of the official

infrastructure in the event of a ‘hard’ Brexit would add to short-run disruption. Both sides will

lose in this outcome, although the largest costs on the EU27 side will be borne by those

Member States with the greatest exposure to UK trade.

The third reason is that the economic disruption that would result from a ‘hard’ Brexit would

be likely to lead to a further significant depreciation of the pound sterling relative to

the euro and other currencies used in the EU27. When the UK referendum result was

announced on 23 June 2016, it led to an immediate 10% drop in the value of sterling which

has not been reversed since then (Figure 1). There would be a strong possibility that markets

would react in the same way faced with the disruptive impact of a ‘hard’ Brexit. A further drop

73 The Council negotiating directives specify the withdrawal date as at the latest 30 March 2019 at 00:00 (Brussels

time). The withdrawal date is sometimes referred to as Brexit Day in this study. 74 Agri-food trade is defined as trade in the Harmonised System Chapters 01-24, source Eurostat with the EU27 as

reporter. 75 For clarity, we refer to the EU Customs Union throughout this paper with initial capital letters, and customs unions

generally in lower case.


123

in the value of sterling would make EU27 exporters to the UK market even less competitive,

on top of the additional trade costs including tariffs they would face. A lower value of sterling

would reduce the price of UK-sourced food for EU27 importers, but this would only partly offset

the higher trade costs they would pay including tariffs in the event of a ‘hard’ Brexit.

Figure 16: Impact of UK referendum result on value of sterling

Source: European Central Bank

Against this background, this study has three objectives which are developed in the following

three chapters. The overall aim is to provide AGRI Committee members with an

overview of the institutional choices that could help to avoid the negative outcomes

of a ‘hard’ Brexit for the agri-food sector, while also exploring the instruments

available under the Common Agricultural Policy (CAP) to mitigate the adverse

impacts that may occur as a result of Brexit.

Chapter 2 surveys the trade costs that agri-food traders selling into or importing

from the UK might face in the event of a ‘hard’ Brexit. It emphasises how these additional

trade costs would bear most heavily on agri-food trade. It also highlights the likelihood of

disruption if the UK leaves the EU by 29 March 2019 without an arrangement which largely

replicates the existing rules for internal market EU trade. It investigates how different ‘ideal

types’ of trade arrangements might help to avoid some or all of these trade costs. It compares

these trade arrangements with examples of current EU trade agreements with third countries.

What is increasingly clear is that, even if the withdrawal agreement is successfully concluded

prior to 29 March 2019 and depending on the nature of the future trade relationship, not all

systems will be in place to facilitate the transition from the current rules applying to UK-EU27

trade to the rules that will apply under the future trade relationship. Again, this is particularly

the case for agri-food trade. Chapter 3 sets out the views of both parties on transition

arrangements and examines how agri-food trade could be affected by different types

of transition arrangement.


124

Any future trade relationship will introduce additional frictions and costs affecting trade flows

between the UK and the EU27 compared to the current situation under the Union acquis. There

is also the possibility that the withdrawal negotiations will not be successfully concluded,

leading to a disorderly Brexit on 29 March 2019. Because the agri-food sector is uniquely

exposed to these higher trade costs and to the negative shock of a disorderly Brexit, it is

prudent to consider how ready the Union is to protect farmers from the immediate impacts of

disruption and to assist them to adjust to the new market conditions that will prevail after

Brexit. Chapter 4 examines the CAP measures able to support EU farmers and to

strengthen agri-export incentives after a ‘hard’ Brexit.

1.2. Article 50

The procedure for a Member State to leave the European Union is governed by Article 50 in

the Treaty of European Union. Relevant extracts include:

“2. A Member State which decides to withdraw shall notify the European Council of its

intention. In the light of the guidelines provided by the European Council, the Union shall

negotiate and conclude an agreement with that State, setting out the arrangements for its

withdrawal, taking account of the framework for its future relationship with the Union. That

agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the

Functioning of the European Union. It shall be concluded on behalf of the Union by the

Council, acting by a qualified majority, after obtaining the consent of the European

Parliament.

3. The Treaties shall cease to apply to the State in question from the date of entry into force

of the withdrawal agreement or, failing that, two years after the notification referred to in

paragraph 2, unless the European Council, in agreement with the Member State concerned,

unanimously decides to extend this period.”

There are three things to note about this Article:

It sets a time limit of two years following the receipt of the notification to withdraw

following which the Treaties would no longer apply to the withdrawing state in the

absence of a withdrawal agreement. This period could be shorter if the withdrawal

agreement entered into force earlier, or it could be longer if the withdrawal agreement

entered into force later, or if there were unanimous agreement by the European Council

and the Member State concerned to extend this time limit.

The withdrawal agreement is approved by a qualified majority in the European

Council (at least 72% of participating Member States (20 out of 27) representing at

least 65% of the population of the 27 remaining Member States voting in favour),

having first received the consent of the European Parliament.

The withdrawal agreement sets out the arrangements for withdrawal of the Member

State concerned, taking account of the framework for its future relationship with

the Union.

1.3. The UK position on the long-term trade relationship

The UK proposal for its future relationship with the EU27 was first set out in the Prime

Minister’s Lancaster House speech on 17 January 2017 (May 2017a). Its broad outline has

remained consistent over time, although critics on the EU side complain that it remains

incomplete and imprecise.


125

In her Lancaster House speech, the Prime Minister set out broad long-term objectives,

twelve principles for the negotiations, and four red lines. These were elaborated and, in some

cases repeated verbatim, in the UK White Paper The United Kingdom’s exit from and new

partnership with the European Union published in February 2017 (HM Government 2017d).

The UK’s broad objectives were defined in the Lancaster House speech as:

“We will pursue a bold and ambitious free trade agreement with the European Union.

This agreement should allow for the freest possible trade in goods and services between

Britain and the EU’s member states. It should give British companies the maximum freedom

to trade with and operate within European markets – and let European businesses do the

same in Britain.

But I want to be clear. What I am proposing cannot mean membership of the single market.

European leaders have said many times that membership means accepting the ‘4 freedoms’

of goods, capital, services and people. And being out of the EU but a member of the single

market would mean complying with the EU’s rules and regulations that implement those

freedoms, without having a vote on what those rules and regulations are. It would mean

accepting a role for the European Court of Justice that would see it still having direct legal

authority in our country.

That agreement may take in elements of current single market arrangements in certain

areas – on the export of cars and lorries for example, or the freedom to provide financial

services across national borders – as it makes no sense to start again from scratch when

Britain and the remaining Member States have adhered to the same rules for so many

years.

…

A Global Britain must be free to strike trade agreements with countries from outside the

European Union too.

That means I do not want Britain to be part of the Common Commercial Policy and I do not

want us to be bound by the Common External Tariff. These are the elements of the Customs

Union that prevent us from striking our own comprehensive trade agreements with other

countries. But I do want us to have a customs agreement with the EU.

Whether that means we must reach a completely new customs agreement, become an

associate member of the Customs Union in some way, or remain a signatory to some

elements of it, I hold no preconceived position. I have an open mind on how we do it. It is

not the means that matter, but the ends.

The key messages in this speech were that the UK would leave the single market, it would

leave the Custom Union, but it wished to pursue a “bold and ambitious” free trade agreement

and it held open the possibility that the UK might opt into specific elements of the EU single

market. Any such agreement would have to observe the four ‘red lines’ mentioned in the

speech:

.. we will take back control of our laws and bring an end to the jurisdiction of

the European Court of Justice in Britain.

.. we will ensure we can control immigration to Britain from Europe. We will

design our immigration system to ensure that we are able to control the numbers of

people who come here from the EU. In future, therefore, the Free Movement Directive

will no longer apply and the migration of EU nationals will be subject to UK law.


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.. we will not be required to contribute huge sums to the EU budget. There may

be some specific European programmes in which we might want to participate. If so,

and this will be for us to decide, it is reasonable that we should make an appropriate

contribution. But the principle is clear: the days of Britain making vast contributions to

the European Union every year will end.

.. [we] must be free to strike trade agreements with countries from outside

the European Union too.

Also of relevance to future trade arrangements is the UK’s position on the border between

Northern Ireland and Ireland. This would be the only land border between the UK and the

EU27 after Brexit, as the Prime Minister recalled in her Article 50 letter. This letter contained

the following commitment:

“We want to avoid a return to a hard border between our two countries, to be able to

maintain the Common Travel Area between us, and to make sure that the UK’s withdrawal

from the EU does not harm the Republic of Ireland. We also have an important responsibility

to make sure that nothing is done to jeopardise the peace process in Northern Ireland, and

to continue to uphold the Belfast Agreement.”

In her Florence speech, the Prime Minister reiterated that the UK will no longer be a member

of the EU single market or its Customs Union. She recognised that “the single market is built

on a balance of rights and obligations” and identified as a joint task the need “to find a new

framework that allows for a close economic partnership but holds those rights and obligations

in a new and different balance”.

She expounded on the nature of the future trade relationship in the following terms:

“One way of approaching this question is to put forward a stark and unimaginative choice

between two models: either something based on European Economic Area membership; or

a traditional Free Trade Agreement, such as that the EU has recently negotiated with

Canada.

I don’t believe either of these options would be best for the UK or best for the European

Union.

European Economic Area membership would mean the UK having to adopt at home -

automatically and in their entirety - new EU rules. Rules over which, in future, we will have

little influence and no vote.

Such a loss of democratic control could not work for the British people. I fear it would

inevitably lead to friction and then a damaging re-opening of the nature of our relationship

in the near future: the very last thing that anyone on either side of the Channel wants.

As for a Canadian style free trade agreement, we should recognise that this is the most

advanced free trade agreement the EU has yet concluded and a breakthrough in trade

between Canada and the EU.

But compared with what exists between Britain and the EU today, it would nevertheless

represent such a restriction on our mutual market access that it would benefit neither of

our economies.

Not only that, it would start from the false premise that there is no pre-existing regulatory

relationship between us. And precedent suggests that it could take years to negotiate.”


127

On the crucial issue of how to settle disputes, for example, over regulatory issues, the Prime

Minister commented:

“To make this partnership work, because disagreements inevitably arise, we will need a

strong and appropriate dispute resolution mechanism.

It is, of course, vital that any agreement reached – its specific terms and the principles on

which it is based – are interpreted in the same way by the European Union and the United

Kingdom and we want to discuss how we do that.

This could not mean the European Court of Justice – or indeed UK courts - being the arbiter

of disputes about the implementation of the agreement between the UK and the EU

however.

It wouldn’t be right for one party’s court to have jurisdiction over the other. But I am

confident we can find an appropriate mechanism for resolving disputes.”

The speech was more notable for what it ruled out that what it proposed. The Prime Minister

ruled out both a model based on the European Economic Area (EEA) and a comprehensive

free trade agreement such as the recent agreement with Canada. This implies the UK would

like a deal somewhere in between these models. But where in between? She also noted that

any trade agreement should implement the joint commitment “that we will not accept any

physical infrastructure at the border” between Northern Ireland and Ireland. However, there

remains a lack of precision with regard to the nature of the long-term trade

relationship with the EU27 that the UK would like, and how it would avoid physical

controls at the border on the island of Ireland.

1.4. The EU27 position on the long-term trade relationship

The European Parliament adopted a resolution on 5 April 2017 on negotiations with the

United Kingdom following its notification that it intended to withdraw from the European Union.

It noted that the UK Prime Minister’s letter triggering the Article 50 withdrawal process

indicated that the UK’s future relationship with the EU “will not include membership of the

internal market or membership of the customs union” (European Parliament 2017).

“Whereas, nevertheless, continued membership of the United Kingdom of the internal

market, the European Economic Area and/or the customs union would have been the

optimal solution for both the United Kingdom and the EU-27; whereas this is not possible

as long as the United Kingdom Government maintains its objections to the four freedoms

and to the jurisdiction of the Court of Justice of the European Union, refuses to make a

general contribution to the Union budget, and wants to conduct its own trade policy.”

The Parliament resolution called for the Article 50 negotiations to begin as soon as possible,

and addressed fair treatment for EU27 and UK citizens who will find themselves living in the

other party after Brexit, a full settlement of financial obligations, and the need to mitigate the

effects of the United Kingdom’s withdrawal on the border between Ireland and Northern

Ireland. It also set down some conditions of its own regarding the nature of the future

relationship:

“Hopes that under these conditions the European Union and the United Kingdom will

establish a future relationship that is fair, as close as possible and balanced in terms of

rights and obligations; regrets the decision by the United Kingdom Government not to

participate in the internal market, the European Economic Area or the customs union;

considers that a state withdrawing from the Union cannot enjoy similar benefits to those

enjoyed by a Union Member State, and therefore announces that it will not consent to any

agreement that would contradict this;


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Believes that the future relationship between the European Union and the United Kingdom

should be balanced and comprehensive and should serve the interests of the citizens of

both parties, and will therefore need sufficient time to be negotiated; stresses that it should

cover areas of common interest while respecting the integrity of the European Union’s legal

order and the fundamental principles and values of the Union, including the integrity of the

internal market as well as the decision-making capacity and autonomy of the Union; notes

that Article 8 of the Treaty on European Union, as well as Article 217 of the Treaty on the

Functioning of the European Union, which provides for ‘establishing an association involving

reciprocal rights and obligations, common action and special procedures’, could provide an

appropriate framework for such a future relationship;

Stresses that any future agreement between the European Union and the United Kingdom

is conditional on the United Kingdom’s continued adherence to the standards provided by

international obligations, including human rights, and the Union’s legislation and policies,

in, among others, the fields of the environment, climate change, the fight against tax

evasion and avoidance, fair competition, trade and social rights, especially safeguards

against social dumping;

Opposes any future agreement between the European Union and the United Kingdom that

would contain piecemeal or sectorial provisions, including with respect to financial services,

providing United Kingdom-based undertakings with preferential access to the internal

market and/or the customs union; underlines that after its withdrawal the United Kingdom

will fall under the third-country regime provided for in Union legislation.”

There are four messages which can be taken from these paragraphs including three which

might be interpreted as the Parliament’s red lines:

Points to an association agreement (under Article 217 of the Treaty on the

Functioning of the European Union, TFEU) as an appropriate framework for the future

relationship.

Underlines that a state withdrawing from the Union cannot enjoy similar benefits

to those enjoyed by a Union Member State.4F

76

Wants any future trade agreement to bind the UK to respecting international

norms and standards in a range of non-trade policy areas such as environment,

climate change, the fight against tax evasion and avoidance, fair competition, and trade

and social rights.

Opposes piecemeal or sectoral provisions that would give UK businesses

preferential access to the single market or customs union.

The European Council (Art. 50) issued its guidelines for the negotiations on 29 April

2017 emphasising the need for a phased approach “giving priority to an orderly

withdrawal”.5F

77 The guidelines were intended to define the framework for negotiations under

Article 50 TEU and set out the overall positions and principles that the Union will pursue

throughout the negotiation. It recognised that the guidelines would need to be updated over

76 Note that this phrase goes back to the Interlaken Principles which were announced on May 20, 1987 by Willy de

Clercq, then EC Commissioner for External Relations, at a ministerial meeting between the then European

Communities (EC) and the European Free Trade Association. They set the principles which the EC would follow in

its trade and economic relations with third countries. The Interlaken Principles make clear that the EU will a)

prioritise internal integration over relations with non-member states and b) the EU will always safeguard its own

decision-making autonomy. The Principles declare that any relationship with the EU must be based on a balance

of benefits and obligations. Non-member states will not be able to choose what aspects of EU integration they

particularly favour. See Phinnemore, D., “Why the UK can’t just pick and choose from the EU menu after Brexit”,

The Conversation, 14 September 2016. 77 “European Council (Article 50) guidelines on Brexit negotiations”, 29 April 2017.

https://theconversation.com/why-the-uk-cant-just-pick-and-choose-from-the-eu-menu-after-brexit-64777

https://ec.europa.eu/commission/publications/european-council-article-50-guidelines-brexit-negotiations_en


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time. The first phase of negotiations would settle the disentanglement of the UK from the EU

and from all the rights and obligations the UK derives from commitments undertaken as a

Member State. The withdrawal agreement would address, in particular, the UK’s long-term

financial commitments to the EU as well as reciprocal rights for British and EU citizens.

It reiterated its wish to have the UK as a close partner in the future, and noted that Article 50

TEU requires taking account of the framework for its future relationship with the Union in the

arrangements for withdrawal. It therefore proposed a second phase of negotiations which

would identify an overall understanding of the framework for this future relationship. “We

stand ready to engage in preliminary and preparatory discussions to this end in the context of

negotiations under Article 50 TEU, as soon as the European Council decides that sufficient

progress has been made in the first phase towards reaching a satisfactory agreement on the

arrangements for an orderly withdrawal”.

The European Council (Art. 50) guidelines also set down some markers for this future

relationship which closely resemble those identified by the European Parliament in its

resolution of 5 April 2017. In summary:

Preserving the integrity of the Single Market excludes participation based on a sector-

by-sector approach.

A non-member of the Union, that does not live up to the same obligations as a member,

cannot have the same rights and enjoy the same benefits as a member.

[A future trade agreement] must ensure a level playing field, notably in terms of

competition and state aid, and in this regard encompass safeguards against unfair

competitive advantages through, inter alia, tax, social, environmental and regulatory

measures and practices.

In view of the unique circumstances on the island of Ireland, flexible and imaginative

solutions will be required, including with the aim of avoiding a hard border, while

respecting the integrity of the Union legal order.

On 22 May 2017 the Council adopted a set of negotiating directives (Council of the

European Union 2017). These cover only the first phase of the negotiations and subsequent

sets of negotiating directives are envisaged to address other issues in the negotiations.

On 20 October 2017, the European Council (Art.50) met to discuss the progress of the

negotiations. It had been anticipated that, if sufficient progress had been achieved in the

negotiations to that date, that European Council meeting might agree to move to the second

phase, keeping in mind the principle that nothing is agreed until everything is agreed. The

European Council noted that progress had been made on some of the issues in the first phase

of the negotiations but concluded that, at this time, insufficient progress had been made

in the first phase of the negotiations to move on to the second.6F

78 Building on the

progress made, it called for:

“… work to continue with a view to consolidating the convergence achieved and pursuing

negotiations in order to be able to move to the second phase of the negotiations as soon

as possible.

At its next session in December, the European Council will reassess the state of progress

in the negotiations with a view to determining whether sufficient progress has been

achieved on each of the three above issues. If so, it will adopt additional guidelines in

relation to the framework for the future relationship and on possible transitional

arrangements which are in the interest of the Union and comply with the conditions and

78 “European Council (Art. 50) conclusions”, 20 October 2017.

http://www.consilium.europa.eu/en/press/press-releases/2017/10/20-euco-art50-conclusions/


130

core principles of the guidelines of 29 April 2017. Against this background, the European

Council invites the Council (Art. 50) together with the Union negotiator to start internal

preparatory discussions”.

In reporting on the European Council outcome, President Donald Tusk noted that: 7F

79

“Today the Council has agreed to start internal preparatory discussions in relation to the

framework for the future relationship and on transitional arrangements. It is clear that this

would not be possible without the new momentum given by the Florence speech of Prime

Minister May. I would like to reassure our British friends that in our internal work we will

take account of proposals presented there. So the negotiations go on, and we will continue

to approach them positively and constructively. And as we are all working actively on a

deal, I hope we will be able to move to the second phase of our talks in December”.

Table 12: Timeline of events around the UK withdrawal from the EU

DATE EVENT

23 June 2016 The UK votes to leave the EU

29 March 2017 UK invokes Article 50

5 April 2017 European Parliament adopts resolution on the UK’s withdrawal from the EU

29 April 2017 European Council adopts its guidelines for the Brexit negotiations

22 May 2017 EU General Affairs Council authorises opening of negotiations with the UK

8 June 2017 UK General Election

19 June 2017 Negotiations between the UK and the EU begin

20 Oct 2017 European Council (Article 50) Summit

14-15 Dec 2017 European Council Summit

22-23 Mar 2018 European Council Summit

28-29 June 2018 European Council Summit

Oct 2018 European Council Summit

Dec 2018 European Council Summit

29 Mar 2019 Deadline for UK withdrawal unless an alternative date is agreed

May 2019 European Parliament elections

October 2019 New Commission takes up office

79 “Remarks by President Donald Tusk on the European Council meetings and the Leaders' Agenda”, 20 October

2017

http://www.consilium.europa.eu/en/press/press-releases/2017/10/20-tusk-final-remarks-european-council/


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2. The issues at stake for agri-food trade

KEY FINDINGS

In the absence of a trade agreement tariffs would be re-imposed on bilateral

UK-EU27 trade. The tariffs applicable to UK exports would be those in the EU’s

Common External Tariff (CET). The tariffs applicable to EU exports to the UK are not

yet known, but at least initially may be kept at the CET level.

Even apart from the imposition of tariffs, the UK would be a less attractive

market for EU agri-food exporters, because intra-EU trade gives exporters higher

prices than sales to the rest of the world, described as a preferential trade transfer.

Customs clearance costs would be an additional cost for firms exporting to

or importing from the UK. These costs are increased for certain agricultural and

food products because of the need for additional border checks to ensure compliance

with EU food safety, plant and animal health regulations.

In the absence of an agreement covering road transport services, hauliers

travelling between the UK and EU27 could face additional costs if there is a

need to secure licences with individual Member States.

Ireland faces particular issues in the event of a ‘hard’ Brexit because of the

importance of the UK land bridge for the transport of agri-food products to and from

the EU27, and because transport from one location in Ireland to another may in some

instances need to travel through Northern Ireland.

A range of potential trade arrangements are available which address one or

more of these potential trade costs. However, the current ability to trade

frictionlessly between the UK and the EU27 is due to the UK’s EU membership and

can only be maintained if the UK were to remain a member of the EU.

There are a number of ‘models’ for the future long-term trade relationship between

the UK and the EU27. These include the ‘Canada’, ‘Turkey’, ‘Ukraine’, ‘Swiss’ and

‘Norway’ models. The UK government has ruled out the Canada, Turkey and

Norway models, but it has not defined where it might like to end up between

the Ukraine and Swiss models. The EU27, for its part, is unlikely to make the

Swiss model available because of its unsatisfactory institutional nature, though its

attitude to the Ukraine model as a template for a future UK partnership has not been

clarified. The Ukraine model is implemented through an Association Agreement with

the EU which is an arrangement that has been specifically endorsed by the European

Parliament.

This chapter defines the meaning of a ‘hard’ Brexit by examining the way agri-food trade takes

place with countries that the EU does not have a trade agreement with but operates under

WTO rules. It identifies the additional costs which food traders in the UK and EU27 would face

compared to the way trade takes place today. These include tariffs, customs clearance costs,

the loss of preferential trade transfers, costs to show compliance with regulatory standards,

and higher costs for transport services. It then discusses how different ‘ideal types’ of trade

arrangement might address these costs. The discussion covers customs agreements, free trade

areas, customs unions, regulatory cooperation and regulatory unions. The EU has a wide

variety of trade agreements with non-member countries which differ in scope and ambition.

The extent to which these actual trade agreements deliver the promised reductions in trade

costs is evaluated.


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2.1. Trade terms in the ‘no deal’ scenario

2.1.1. Tariffs

The most obvious consequence of a ‘hard’ Brexit would be the re-introduction of tariffs on agri-

food trade between the UK and the EU27. The EU’s tariffs including on agri-food products would

be those set out in the Common External Tariff (CET) which can be accessed via TARIC. 8F

80 The

UK’s tariffs which would apply in the event of a ‘hard’ Brexit are not yet known. The tariffs the

UK could impose (‘applied tariffs’) would be limited under WTO rules in two ways: (a) they

cannot exceed the maximum tariff levels (called ‘bound tariffs’) contained in the UK’s Schedule

of Concessions in Goods which has yet to be notified to the WTO, and (b) they cannot

discriminate between different import sources (for this reason, these applied tariffs are often

referred to as Most Favoured Nation (MFN) tariffs). This means that the UK would have to

apply the same tariffs on products imported from the EU27 as from other countries,

with the important exception of countries with which it has signed a WTO-compatible

preferential trade agreement, preferences granted to developing countries under the WTO

Enabling Clause or where a specific waiver has been granted.

The UK is a member of the WTO in its own right but its Schedule is currently that notified by

the EU. The UK has indicated that it will seek the replicate the bound tariffs in the EU’s Schedule

of Concessions in Goods when it extracts its own Schedule after Brexit. 9F

81 Under a ‘hard Brexit’

scenario, it would be at liberty to decide what level of applied tariffs it would wish to apply to

EU27 imports, provided these met the two WTO restrictions in the previous paragraph. As

mentioned, in the EU27’s case, the tariffs that would apply to the UK once it ceased to be an

EU member are those set out in the EU’s TARIC.

The UK has not yet clarified what approach it intends to take to its applied tariffs

after Brexit. In its White Paper on future UK trade policy, it stated that “The Government …

intends to introduce legislation that would allow the UK to operate standalone customs and

indirect tax regimes as we withdraw from the EU. This will include the power to set customs

duties, tariff rate quotas and preferences, as well as wider tariff-related provisions” (HM

Department of International Trade 2017). However, no indication is given in the White Paper

whether the UK intends to change its current tariffs. In the White Paper on the future Customs

Bill, the UK government notes that under the new UK standalone customs regime “The level of

this duty would be decided by the government, and set out in secondary legislation before the

UK leaves the EU” (HM Treasury 2017). Again, there is neither a commitment to maintaining

current tariffs nor any specific proposal to alter them.

There have been suggestions that applied tariffs might be reduced on products not

produced in the UK (e.g. citrus fruit) or where imported products are an important raw material

for a domestic processing industry (e.g. sugar). The UK might also be tempted to simplify some

of the highly complex elements of the current EU applied tariff schedule, such as the Meursing

formula which sets tariffs for processed foods and the entry price system for certain fruits and

vegetables. Other voices outside government have argued in favour of a more wholesale

reduction in applied tariffs as part of the move towards a ‘Global Britain’ strategy. A reduction

in applied tariffs might also be seen as a way to mitigate some of the effects of higher food

prices on UK consumers due to the additional trade costs and any further depreciation of

sterling in the run-up to Brexit Day (alternatively, it would be open to the UK to unilaterally

introduce erga omnes tariff rate quotas based on current import quantities to achieve the same

objective). In the Trade Policy White Paper, the UK government invited the views of businesses

and other stakeholders on, inter alia, “an inclusive and transparent trade policy” to be

80 TARIC is the integrated Tariff of the European Union, which is a multilingual database in which are integrated all

measures relating to EU customs tariff, commercial and agricultural legislation. 81 UK Department for International Trade, Preparing for our Future UK Trade Policy, HMSO, 2017, p. 25.

http://ec.europa.eu/taxation_customs/dds2/taric/taric_consultation.jsp


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submitted by early November 2017. At this point in time, there remains uncertainty about

the level of applied tariffs that would face EU27 exporters in the event of a ‘hard

Brexit’ scenario, but it may be reasonable to assume that, at least initially, the UK

will apply the same MFN tariffs as it does today under the EU’s CET.

Table 13: EU's applied MFN tariff summary, 2016

Number

of lines

Simple average

(%)

Tariff

range (%)

Standard

deviation

Share of duty-free lines (%)

Share of non-ad

valorem tariffs (%)

Total 9,414 6.3 0-695.5a 12.1 26.1 10.6

HS 01-24 2,456 14.2 0-695.5a 21.7 15.3 38.3

By WTO category

WTO agricultural

products 2,075 14.1 0-695.5a 23.7 19.1 46.4

Animals and

products thereof 351 19.4 0-132.5 21.3 15.1 68.7

Dairy products 151 35.6 2.8-695.5a 65 0 100

Fruit, vegetables,

and plants 508 13 0-169.9 13.9 11.8 16.9

Coffee, tea, and

cocoa and cocoa

preparations 47 11.3 0-18.7 6.7 14.9 51.1

Cereals and

preparations 230 14.9 0-76.9 11.9 8.7 80

Oilseeds, fats, oil

and their products 174 6 0-103.5 10.4 35.6 6.9

Sugars and

confectionery 44 26.8 0-172.7 37.5 4.5 88.6

Beverages, spirits

and tobacco 305 12.8 0-76.8 15.9 18 55.4

Cotton 6 0 0-0 0 100 0

Other agricultural

products, n.e.s. 259 5.8 0-168.7 16 51 22

Notes: a The tariff peak was calculated on a tariff line for which imports in 2015 were 0.1 tonnes. The next tariff

peak in the dairy sector was 187.2%.

Calculations for averages are based on the national tariff line level (8-digit), excluding in-quota rates. Tariff schedule

is based on HS2012. Ad Valorem Equivalents (AVEs) for specific tariffs were estimated based on 2015 import data at

the 8-digit tariff from the Eurostat database. If unavailable, the ad valorem part is used for compound and mixed

rates.

Source: WTO, 2017

The scale of tariffs that would apply if the UK were to adopt the current EU CET is shown in

Table 2. The highest average tariffs would be faced by EU27 exports of dairy products, sugars

and confectionery, and animal products. The highest peak tariffs are also found in these

sectors but also in the category ‘Other agricultural products n.e.s’. In defining a ‘hard’ Brexit,

we assume that the UK will continue to apply the EU MFN tariff schedule after Brexit on trade

with third countries with which it does not have a Free Trade Agreement (FTA).


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2.1.2. Loss of preferential trade transfers

The loss of preferential trade transfers on EU27 agri-food exports to the UK is not,

strictly, a trade cost but it is a consequence of a ‘hard’ Brexit. Preferential trade transfers

arise on agri-food exports to the UK because the UK currently applies the EU’s Common

External Tariff. This means that UK consumers pay a (somewhat) higher price for foodstuffs

imported from the EU27 than they would have to pay if these products were imported from

third countries at world market prices. The Customs Union effectively gives a preference to EU

exporters in supplying the UK market which is why this trade transfer is called a preferential

one. The difference between the price paid by UK consumers behind the EU tariff wall for EU27

exports and the price EU exporters would receive if the products were sold at world market

prices is the measure of the preferential trade transfer accruing to EU27 exporters.

This preferential trade transfer on exports to the UK market might be eroded in two

ways in a ‘hard’ Brexit. One way would be if the UK decided to lower or eliminate its MFN

tariffs on foodstuffs. In the situation of full elimination, EU27 exporters would not face tariffs

on exporting to the UK market, but the UK market would be a less attractive one because the

price exporters would receive would be lower than they currently earn on these exports.

Maintaining tariff-free trade between the UK and the EU27 after Brexit would not avoid the loss

of this preferential trade transfer if the UK decided to lower the level of its tariff protection.

It would also be possible for EU27 exporters to face both higher tariffs and the loss of the

preferential trade transfer. This would occur if the UK applied MFN tariffs to EU27 exports but

entered into free trade agreements with third country competitive agricultural exporters which

effectively drove down domestic UK food prices to world market levels. This ‘double whammy’

would be the consequence of the additional discrimination against EU27 exporters in a situation

where the UK raised tariffs against EU27 exporters but lowered them against third country

competitive agricultural exporters as a result of free trade agreements with these countries.

The preferential trade transfer on intra-EU trade has fallen significantly in recent

years as EU producer prices have converged on world market prices, in part due to

successive CAP reforms, and in part due to the rise in world market prices over the past decade.

The left-hand panel in Figure 2 shows that the average difference between EU producer and

world market prices has steadily declined but remains positive in recent years. The right-hand

panel shows that the remaining gap is largely the result of continued EU protection for a handful

of commodities, in particular beef, sugar, poultrymeat and some vegetables. These are the

products where EU27 exports to the UK market continue to earn a preferential trade transfer.

A corollary of the fall in the preferential trade transfer earned on exports to the UK in recent

years is that the potential fall in UK food prices if it were to lower or eliminate its applied tariffs

on imported foodstuffs is now much smaller than might have been estimated based on figures

from a decade ago.


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Figure 17: Gap between EU and world market prices

Source: Own calculations based on the OECD Producer Support Estimate (PSE) database. The left–hand panel shows

the trend in the producer Nominal Protection Coefficient, the right-hand panel uses the consumer Nominal Protection

Coefficient. Note that DG AGRI’s Key Performance Indicator 2 suggests that the fall in the ratio between EU and world

agricultural commodity prices has been even steeper than shown in the OECD database, from almost 40% in 2005 to

6% in 2016 (DG AGRI 2017). There are several world market reference prices in the meat sector. In calculating the

EU PSE, the OECD uses the average price of fresh and chilled imports from Australia. If Brazil’s export price were

used, the Nominal Protection Coefficient shown for beef would be higher.

2.1.3. Customs clearance

Since the Single Market was established on 1 January 1993, goods leaving the UK for

elsewhere in the EU, and vice versa, have not been subject to customs checks at frontiers. In

the event of a ‘hard’ Brexit, there will be a requirement for customs clearance. Customs

clearance gives rise to two sources of additional costs: the costs of clearance as

such, and the time costs of delay while goods are being cleared. While it is possible to

minimise these costs (a process called ‘trade facilitation’), it is not possible to avoid them. We

consider each of these costs in turn in the context of UK-EU27 agri-food trade in the event of

a ‘hard’ Brexit.

Customs processes have a number of different objectives (Table 3).

Tariffs. Ensure that any customs duties are paid when goods arrive from third countries

and the goods are released either at the border or subsequently (suspended duty),

including the administration of tariff preferences, tariff quotas, tariff suspensions, and

anti-dumping duties at importation.

Tax. Collect import VAT and any excises when goods are released.

Documentation. Ensure businesses correctly declare goods for import or export and

provide the required documentation, including customs declarations, safety and security

information and any licenses required or supporting documentation (such as that

required to demonstrate the origin of goods, as may be required under a future free

trade agreement between the UK and the EU27);

Standards. Ensure that the goods entering comply with relevant safety and

environmental standards, with special attention paid to products such as food products,

chemicals and electrical equipment.

Supply chain security. Security aspects were first introduced in customs legislation

in the aftermath of the terrorist attacks in September 2001 in the United States. In

2005 the World Customs Organisation adopted the SAFE Framework of Standards that

introduced security measures for supply chains, including the requirement for advanced

cargo data notification, security risk assessment and an industry partnership

(Authorised Economic Operator) programme.


136

Table 14: Examples of customs and other controls in international trade

CONTROLS EXAMPLES OF RELATED ACTIVITY

Revenue collection Collection of customs duties, excise duties and other indirect taxes;

payment of duties and fees; management of bonds and other financial

securities

Safety and security Security and anti-smuggling controls; dangerous goods; vehicle checks;

immigration and visa formalities; export licences

Environment and health Phytosanitary, veterinary and hygiene controls; health and safety

measures; CITES controls; ships’ waste

Consumer protection Product testing; labelling; conformity checks with marketing standards

(e.g. fruits and vegetables)

Trade policy Administration and enforcement of quotas, surveillance measures and

quantitative restrictions

Source: Grainger, 2015

Under the EU Customs Union, customs policy is the exclusive competence of the EU. The EU

Customs Union comprises the 28 EU Member States, with Turkey, San Marino and Andorra

also having their own customs unions with the EU. All EU Member States are required to

operate customs procedures in accordance with EU legislation (the key legislation being the

Union Customs Code).

In October 2013, the EU introduced a new Union Customs Code (UCC) (Regulation 952/2013)

and Delegated and Implementing Regulations (as amended). This changed a number of the

rules and procedures governing the way that customs duties are levied, calculated and

collected by EU Member States. Part of these changes is to require that all communications

between customs authorities and economic operators must be electronic by December 2020.

These changes came into force in 2016, with some transition arrangements operating until

the end of 2020.

HOW CUSTOMS CONTROLS WORK IN THE EU

Carriers must submit an Entry Summary Declaration via an electronic information system

before the arrival of the goods in the EU which is a pre-arrival declaration for risk analysis. A

similar declaration (Exit Summary Declaration) is required before the departure of goods out

of the EU again to facilitate risk analysis.

Traders must lodge a customs declaration form (known as the Single Administrative

Document/SAD) for goods imported from and exported to countries outside the EU which

requires 54 boxes of information from details of the consignor to the consignee, the product

details and tariff details, values, country of origin information, weights and packaging

information and terms of trade. Some trusted traders (AEOs) can make simplified declarations

at the border and provide a supplementary declaration later.

Traders pay any tax and duty which is due on imports. Payment is due on clearance at the

border, unless the trader is part of the duty deferment scheme and pays a single sum each

month (this facility is subject to provision of a bank guarantee).

Importers and exporters can be subject to post clearance audit checks by Customs at any time

within the following three or four years. Businesses have to keep customs paperwork for this

period.

Most goods are cleared for import/export instantly. However, a small sample must be subject

to documentary checks by customs (of the order 2-3%) and a smaller sample undergo physical

checks as required by the harmonised risk management rules under the UCC (the proportions

for certain agri-food products are significantly higher as discussed in the text).


137

The level of import checks required at borders can be reduced as the result of pre-

authorisation of traders, advance lodgement of declarations and an extensive

system of post-clearance checks, including customs audit, which are carried out at

traders’ premises. Authorised Economic Operators (AEOs) have a special status in the

system and under agreed protocols are allowed to operate greatly simplified customs

procedures. 10F

82 While currently AEOs tend to be large firms (which tend to account for the bulk

of international trade), the new EU UCC opens the possibility for smaller traders to receive

this authorisation. This is scheduled to happen regardless of Brexit, but has obvious

implications for how customs procedures might operate with the UK after Brexit.

2.1.4. Regulatory checks on food products

Specific rules apply to the import of food and especially animal products. According to the

General Food Law (Regulation 178/2002), food and feed imported into the EU must comply

with food law or conditions recognised as equivalent or, where a specific agreement exists,

with requirements contained therein (Article 11 - Imports). The regulations differentiate

between food of non-animal origin, food of animal origin, and food containing both processed

ingredients of animal origin and ingredients of plant origin (composite foods). Depending on

the product and where appropriate, imports are required to meet food hygiene standards;

other health requirements (e.g. maximum residue levels for pesticides, the use of food

additives, flavourings and enzymes, contaminants); product specific requirements (e.g.

concerning quick frozen foodstuffs, foodstuffs for particular nutritional purposes, genetically

modified organisms or approved residue control plans); plant health requirements; and animal

health requirements.

Food of non-animal origin. The EU rules on food hygiene require that all food businesses in

third countries after primary production wishing to export to the EU must put in place,

implement and maintain a procedure based on HACCP principles. 11F

83 The competent authorities

in the Member States must ensure that foodstuffs imported into the EU are submitted to official

controls for the purpose of ensuring that the relevant provisions of the food hygiene rules,

including the requirement of putting in place, implementing and maintaining HACCP-based

procedures, are observed.

Most food of non-animal origin can enter the EU through any entry point and is not subject to

specific import conditions, a pre-notification requirement nor certification by the competent

authorities of the third country of dispatch. When importing food into the EU responsibility

rests with the importer to ensure compliance with the relevant requirements of EU food law

or with conditions recognised as ‘equivalent’ by the EU. Nonetheless, some food of non-

animal origin may be submitted to controls in accordance with a control plan drawn

up by the Commission in the light of potential risks. Such controls may be at the point

of entry, the point of release for free circulation, the importer’s premises, retail outlets etc.

The Commission has established a list of food of non-animal origin that, on the basis of known

or emerging risks, must be subjected to an increased level of official controls when entering

the EU.

82 The EU Authorised Economic Operator (AEO) system permits qualifying companies to undergo streamlined

customs procedures under the Union Customs Code. It applies to companies authorised for customs simplification

(AEOC) or security or safety (AEOS) or a combination of the two. This is a version of the ‘trusted trader’ scheme

used in other countries and allows importers to ‘fast track’ customs, reducing the burden of checks, security and

taxation requirements for regular importers. SEE DG TAXUD “Authorised Economic Operator” for more detail. 83 HACCP stands for Hazard Analysis Critical Control Point and is a systematic approach to the identification,

evaluation, and control of food safety hazards.

https://ec.europa.eu/taxation_customs/general-information-customs/customs-security/authorised-economic-operator-aeo/authorised-economic-operator-aeo_en


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Under the currently applicable legislation on trade in plants and plant products (Directive

2000/29/EC), 12F

84 a phytosanitary certificate from the competent authority in the exporting

country is required for plants for planting, cut flowers, and some fruits, vegetables and seeds

(‘controlled plants’). For non-controlled plants, imports into the EU do not require prior

approval or notification, although they are subject to rules on food safety and customs

procedures and inspection. 13F

85 Under the new Regulation (EU) 2016/2031 which will come into

force in December 2019, all living plant material (namely entire plants, fruits, vegetables, cut

flowers, seeds, etc.) will require a phytosanitary certificate confirming their compliance with

the EU legislation if they are to be imported into the EU. The Commission will adopt within two

years a list of plant materials that can be exempted from that certification if they are deemed

safe for the EU territory.

Once the UK becomes a third country, movement of controlled plants and plant

products from the UK to the EU27 (and, under the UK European Union (Withdrawal)

Bill, from the EU27 to the UK) will have to be accompanied by a phytosanitary

certificate issued by the plant health authority of the country of origin rather than a

plant passport. This will involve additional costs for those moving plants and plant materials

between the UK and the EU27. Whereas a plant passport can be issued by a private grower

or merchant sending material to another Member State (the only proviso is that the issuing

business is licensed to do so by the competent authority in the Member State and is subject

to regular quality control checks), a phytosanitary certificate has to be issued by the

competent authority of the exporting state. Importers of controlled plants and plant products

will have to register as an importer and will have to give advance notice of the arrival of

consignments. When the consignment arrives at the EU27 (or UK) border, it will have to be

inspected to check that it is accompanied by all the required documents, that it contains the

plants claimed, and that it is free of pests and diseases. Consignments can only enter through

Designated Points of Entry (DPEs).

Products of animal origin. Products of animal origin must be presented at an EU

approved Border Inspection Post for submission to an import control. Prior notification

of the physical arrival of the products in the EU must be provided to the border inspection post

of arrival using the Common Veterinary Entry Document (CVED). Consignments will only be

accepted if the products are derived from approved third countries, regions thereof and

establishments as appropriate and if veterinary checks had favourable results. Health

certificates must accompany all animal products when introduced into the EU. These

documents must be signed by an official veterinarian of the competent authority of the

exporting third country guaranteeing that the conditions for import into the EU have been met.

Further random checks may be carried out on the imported product at the final destination.

The Official Controls Regulation (Regulation (EC) No 882/2004) provides national authorities

and the Commission with the necessary powers to ensure effective enforcement of regulatory

requirements, including audit and control powers in the Member States and third countries. It

lays down specific rules for official controls on imported products. All products of animal origin

are subjected to a documentary check. Most consignments are also subject to an identity

check which involves verification that the product, health marks, stamps and other necessary

product and or package information conform to the declaration on the health certificates and

EU legislation. A percentage of consignments must also be physically checked to see

that it is fit for its intended purpose. The physical check may include sampling the product

84 A new plant health Regulation (EU) 2016/2031 on protective measures against pests of plants was adopted on 13

December 2016 but its provisions will not come into force until 13 December 2019 in order to allow sufficient time

for the necessary delegated and implementing acts to be adopted and to give time to businesses to prepare for

the new rules. For a summary of the changes brought in by the new Regulation, see European Commission Fact

Sheet, “New Plant Health Regulation: stringent rules for a better protection from plant pests”, 13 Dec 2016. 85 Details of the EU regulations governing imports of plants & plant products from non-EU countries can be found on

the DG SANTE web page “Trade in plants & plant products from non-EU countries”.

http://europa.eu/rapid/press-release_MEMO-16-4310_en.htm

https://ec.europa.eu/food/plant/plant_health_biosecurity/non_eu_trade_en


139

to look for pathogenic micro-organisms or illegal contaminants such as veterinary drugs

residues or heavy metals. Commission Decision 94/360/EC prescribes the level of physical

checks for certain products. In general, the minimum number of consignments to be subjected

to a physical check are 20% for meat, meat products, fish, fishery products, 50% for poultry

meat, honey, dairy products and shellfish, and at between 1% and 10% for most products of

animal origin that are not intended for human consumption. For certain products where there

is a known health risk the Commission may prescribe a higher level of checking which may

include compulsory sampling. The EU has negotiated equivalence agreements with New

Zealand and Canada and imports from these countries are subject to lower physical checks

and in the case of New Zealand the charges levied for imports are at a reduced level.

A new Official Controls Regulation (Regulation (EU) 2017/625) which replaces the 2004

legislation entered into force on 27 April 2017. The new rules will gradually become applicable

with the main application date being 14 December 2019. 14 F

86 The regulation establishes an

integrated approach to import controls by eliminating the current fragmentation of

requirements. Common rules will apply to controls carried out at borders on animals, products

of animal origin, plants and other products and goods that must be checked before they enter

the EU. The import control system will be more risk-based and targeted. Border Control Posts

(BCPs) will replace the different Border Inspection Posts (BIPs) and Designated Points of Entry

(DPEs) which currently carry out border control tasks. All consignments to be presented at the

border control posts will undergo documentary checks. Identity and physical checks will be

carried out at a frequency depending on the risk linked to the specific animals or goods. A

single standard document, the Common Health Entry Document (CHED), will be used by

operators for the prior notification of consignments. It will be transmitted to the border control

post through a new integrated computerised system for official controls (Integrated

Management System for Official Controls, IMSOC).

In dealing with customs, a company can employ a clearance agent or freight forwarder to act

as their representative (which is an additional cost), or they can request authorisation to lodge

these declarations themselves. In either case, these are additional direct costs of customs

clearance. Examples of charges in force are given in Annex 1 of this study.

2.1.5. Road transport services

The importance of haulage services for the transport of goods across customs borders should

not be underestimated. One of the main reasons for the often choking congestion that Turkish

hauliers face on the Turkey-Bulgaria border is because Turkey does not have an agreement in

transport services with the EU. There is a risk of further border delays in the absence

of a UK-EU27 deal on the movement of trucks or lorries, vehicle registration, and the

ability of drivers who are EU nationals to drive vehicles into the UK and vice versa if

a customs border is established after 29 March 2019.

Bilateral traffic-sharing agreements are the predominant mode of organisation of international

road transport. These split the traffic between the two parties to the exclusion of all others

and provide a quantitative framework by annually establishing quotas for the number of

authorised journeys. One estimate suggests that there are around 1,400 bilateral agreements

for the 43 states participating in the European Conference of Ministers for Transport (ECMT),

that is some 20 agreements per EU Member State and 30 to 35 agreements for the other

member countries (WTO 2010). Under the ECMT model agreement, which is considered

broadly representative of existing road transport agreements in Europe, permits are required

for many types of traffic (although with exceptions, such as transport of live animals). Quotas

are agreed on the number of individual journeys or the number of permits issued (though with

86 The rules for official controls on imported food and feed products are described on this DG SANTE web page.

https://ec.europa.eu/food/safety/official_controls/legislation/imports_en


140

the important exception that quotas do not generally apply to traffic with perishable goods).

Bilateral quotas are always fixed at the same level for both parties. Accordingly, it often

happens that, when the two countries are not equally competitive, the quota allocated to the

more competitive country is exhausted before the end of the year. In these circumstances,

the country that has exhausted its quota tries to obtain an additional quota from its partner.

If it is unable to do so or if the additional quota is exhausted in its turn, the goods can still be

carried but with additional costs and journey times, either by the less competitive country or

by carriers of a third country that has not yet exhausted its quota.

International road haulage with HGVs within the EU is authorised by the EU-wide

‘community licence’ system. Hauliers with a community licence established in any

EU Member State are permitted to undertake any international road haulage in the

EU - the international road haulage market in the EU is fully liberalised. However, road

transport between EU and non-EU countries (third countries) is still largely based on bilateral

agreements between individual Member States and third countries. The EU has only agreed

open-access road transport deals with those neighbouring EU countries that have committed

to observing the rules of the single market including free movement of persons (these are the

EEA agreement with Norway, Iceland and Liechtenstein and the agreement on land transport

between the EU and Switzerland). In a worst-case scenario, the UK could be required to

negotiate lorry quotas with individual EU27 countries and presumably would retaliate with

similar quota restrictions on the number of EU27 hauliers that could operate to the UK. 15 F

87

2.2. Specific issues facing Ireland

The particular problems facing Ireland in the event of a ‘hard’ Brexit have been highlighted in

the European Council (Art.50) guidelines, the Council’s negotiating directives, the European

Parliament resolutions on Brexit, and in the UK government’s position and future partnership

papers.

It is estimated that, in the space of one month 177,000 lorries, 205,000 vans and

over 1.8 million cars cross the border between Ireland and Northern Ireland. Each

day it is estimated that 30,000 people make the cross-border commute to work. 16F

88 Cross-

border flows of agricultural products are particularly important. The shared land border

between Ireland and Northern Ireland has resulted in the development of a highly integrated

agri-food sector, with large volumes of trade annually in live animals, finished products and

products requiring further processing. Over 400,000 pigs are exported live from Ireland to

Northern Ireland for processing annually, with almost 400,000 lambs imported from Northern

Ireland for processing. Over 800m litres of milk are imported from Northern Ireland annually,

much of which is processed and exported from Ireland. Overall, in 2015, exports of agricultural

products from Ireland to Northern Ireland (including food, drink, forestry and animal by-

products) were €750m, with imports from Northern Ireland of €567m (IFA 2016). A future

border between Ireland and Northern Ireland would be most similar to the border with

Germany or France and Switzerland in terms of the intensity of traffic across this border.

However, while movement of persons across these frontiers takes place without restrictions

as all countries are parties to the Schengen Agreement (although where there is a suspicion

of irregularities, controls are allowed in all Schengen countries and at the border as well), the

movement of goods requires customs clearance and there are dozens of customs posts along

the Swiss border with its EU neighbours. 17F

89

87 For this reason, the UK road haulage industry proposes that the UK and the EU27 would enter into a Land Transport

Agreement for international road haulage that maintains the basic structure of the community licence system. See

Road Haulage Association, “Proposal for a UK-EU Land Transport Agreement”, 4 May 2017. 88 Gough, A. “Plan, act and engage for a better Brexit”, InterTrade Ireland. 89 For details see the Swiss Customs Administration web site.

https://www.rha.uk.net/getmedia/3f69dbb9-d31f-4c48-bc4b-75640a2917e6/170504-draft-RHA-proposal-for-LTA.pdf.aspx

http://www.intertradeireland.com/blog/entries/2017/plan-act-and-engage-for-a-better-brexit.php

https://www.ezv.admin.ch/ezv/en/home.html


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Both the UK and the EU27 have made clear that they do not wish to see a return to

a hard border on the island of Ireland. The European Council (Art. 50) guidelines state

“In view of the unique circumstances on the island of Ireland, flexible and imaginative solutions

will be required, including with the aim of avoiding a hard border, while respecting the integrity

of the Union legal order”. This was repeated in the Council negotiating directives for the first

phase of the withdrawal negotiations which stated that “Negotiations should in particular aim

to avoid the creation of a hard border on the island of Ireland, while respecting the integrity

of the Union legal order”. The UK has also stated its intention to avoid a hard border in Ireland,

most recently in its White Paper on a future Customs Bill (HM Treasury, 2017), and specifically

stating its aim “to avoid any physical border infrastructure.” Whether this objective is possible

and how it might be achieved is discussed later in this chapter.

Although the ambition to avoid a hard border on the island of Ireland has received most

attention, in terms of the volume and value of trade involved a more important issue

concerns the implications of Brexit for the Irish ‘land bridge’ to continental EU

markets. After Brexit Ireland will be the only EU country which must access other EU countries

in the single market using road freight by passing through a non-EU country.18F

90 At present, it

is estimated that around two-thirds of Irish exports to the continent move via the UK. 19F

91 This

involves two ferry crossings (one over the Irish Sea and the other over the Channel between

the UK and France, Belgium or the Netherlands) as well as using the UK as a land bridge. Once

the UK leaves the EU, there is the possibility that Irish hauliers would be stopped four times

for customs clearance on the way to service customers in the rest of the EU (and vice versa

for EU hauliers transporting goods from the rest of the EU27 to Ireland). Movements could

take place using sealed TIR trucks provided the UK joins the Common Transit Convention as

it has indicated it wants to, but international TIR movements provide much less flexibility to

hauliers than they currently enjoy under single market rules (see further discussion later in

this chapter). The alternative of direct ferry movements between Ireland and France is much

less attractive and would be much more costly. A truck takes 10.5 hours to travel between

Dublin and Zeebrugge over the UK land bridge: the same journey via Cherbourg would take

three times as long. 20F

92 This problem has been recognised in the Council’s negotiating directives

which noted that: “The [withdrawal] Agreement should also address issues arising from

Ireland’s unique geographic situation, including transit of goods (to and from Ireland via the

United Kingdom)”. Transit issues will also arise in moving goods from one part of Ireland to

another when the shortest route may be through Northern Ireland.

2.3. Trade arrangements to avoid or mitigate trade costs

If the UK leaves the EU without a trade agreement (a ‘hard’ Brexit), traders would be required

to absorb all the additional trade costs identified in Section 2.1: customs clearance costs,

tariffs, and the costs of complying with and demonstrating that regulatory standards had been

met. A trade agreement between the UK and the EU after Brexit would allow some,

or even most, of these costs to be avoided. The catch is that avoiding these costs

would come with the trade-off of less policy autonomy for the UK. One of the promises

90 There is significant goods traffic from Northern Europe to Italy which passes through Switzerland. Swiss borders

are more manageable because of the bilateral agreements between Switzerland and the EU which mean that

effectively, if not legally, it is part of the European Economic Area for goods. Greece has a land border with Bulgaria

but the majority of its goods exports to the rest of the EU use RoRo services to Italy. This would not be feasible

in the case of Ireland for reasons discussed later. 91 The Independent, “Majority of exporters travel through Britain to ship goods overseas”, 10 March 2017. The figure

of 80% is quoted in Posaner, J. and Livingstone, E. “Brexit burns Ireland’s British bridge to EU markets”, Politico

(Europe edition), 20 July 2017. The Irish Department of Transport, Tourism and Sport has commissioned a study

into the use of the UK land bridge by Irish importers and exporters. The research is intended to establish the

volume of traffic using the UK land bridge at present, the likely consequences that Brexit will have on land bridge

usage and the various options to minimise the likely consequences. See Minister’s reply to a Dail question, 11

September 2017. 92 Posaner and Livingstone, op. cit.

http://www.independent.ie/business/brexit/majority-of-exporters-travel-through-britain-to-ship-goodsoverseas-35517444.html

http://www.politico.eu/article/cargo-food-production-producers-brexit-burns-irelands-british-bridge-to-eu-markets/

https://www.kildarestreet.com/wrans/?id=2017-09-11a.4454


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of those campaigning for the UK to leave the EU was ‘to take back control’. At the time of

writing, the UK government seems undecided as to how much policy autonomy it is prepared

to cede in order to achieve ‘almost frictionless’ trade between the two parties. The choices it

faces are discussed in this section and summarised in Figure 3. Trade facilitation refers to

steps that the customs and health authorities can take to minimise the checks and the time

required to clear goods through customs, while the other scenarios refer to trade agreements

with different levels of ambition.

Figure 18: Alternative post-Brexit trade scenarios beyond WTO terms

Barrier

Customs

agree-

ment

Free Trade

Area (FTA) FTA+

Customs

Union

(CU)

CU+

Single

market

(Regulatory

Union)

Trade

facilitation Yes Yes Yes Yes Yes Yes

Tariffs Not

affected Removed Removed Removed Removed Removed

Preferential

rent Lost Lost Retained Retained Lost

Rules of

origin Yes Yes No No Yes

Customs

clearance Yes Yes Yes Yes Yes

Regulatory

controls Yes Reduced Yes Reduced No

Source: Own presentation. Note that the single market scenario is assumed not to include a customs union.

It should be absolutely clear that the current ability to trade frictionlessly between the UK and

the EU27 is due to the UK’s membership of the EU and can only be maintained if the UK were

to remain a member. As the UK customs future partnership paper admits, any alternatives will

increase the burden for business — whether by requiring companies to declare goods traded

with the EU27 in the case of a streamlined system or by obliging them to track their final

destination in a deeper customs partnership with the bloc.

If the option of continued UK membership of the EU is off the table, it remains the

case that a lot can be done to reduce the additional trade costs that businesses will

face through a future long-term trade agreement. Many of the proposals put forward in

the UK policy papers are sensible proposals, once it is accepted that they are second-best

proposals compared to avoiding the consequences of having to deal with Brexit in the first

place, and that they cannot fully replicate the frictionless trade within the single market and

the Customs Union. The choice for the EU27 is how far it is ready to go to embrace these

proposals, given the red lines set down by the European Council (Art. 50) and the European

Parliament, particularly the refusal to extend participation in the single market on a sector-

by-sector approach. 21 F

93 If one objective of the UK in withdrawing from the EU is to gain the

ability to lower or remove regulatory standards, the EU27 will want to ensure that any

proposals to facilitate trade will not undermine EU27 standards.

93 If Canada had approached the EU during the negotiations on the EU-Canada Comprehensive Economic and Trade

Agreement (CETA) and offered to align its food safety and animal health regulations precisely with those of the

EU in order to facilitate an agreement on regulatory equivalence which would avoid the need for regulatory checks

on trade between the two countries, it is interesting to speculate how the EU might have responded to that offer.

The United States and Canada signed such an agreement recognising each other’s food safety systems as

comparable to each other in May 2016 even though there is not full alignment.


143

2.3.1. Customs agreement

The UK has proposed a customs arrangement with the EU27 “that facilitates the freest

and most frictionless trade in goods possible, and which, crucially, avoids a hard border and

any physical border infrastructure on the island of Ireland” (HM Government 2017a). The UK

published a future partnership paper on customs arrangements in June 2017 in which it put

forward two possible models for future customs co-operation to minimise the costs and delays

of clearing customs as discussed previously: the streamlined and the partnership models (HM

Government 2017b).

The highly streamlined customs arrangement between the UK and the EU27 would

involve:

“streamlining and simplifying requirements, leaving as few additional requirements on EU

trade as possible. This would aim to: continue some of the existing arrangements between

the UK and the EU; put in place new negotiated and potentially unilateral facilitations to

reduce and remove barriers to trade; and implement technology-based solutions to make

it easier to comply with customs procedures. This approach involves utilising the UK’s

existing tried and trusted third country processes for UK-EU trade, building on EU and

international precedents, and developing new innovative facilitations to deliver as

frictionless a customs border as possible”.

Four examples of simplification are given in the UK customs paper to illustrate how the

streamlining model might work.

Simplifying requirements to move goods across frontiers, by negotiating a waiver from

the requirement to submit Entry and Exit Summary Declarations and by joining the

Common Transit Convention which simplifies border crossing for goods in transit.

Reducing delays at ports and airports by negotiating mutual recognition of Authorised

Economic Operators (AEOs) and implementing bilateral technology-based solutions for

roll-on roll-off ports linked to customs declarations and vehicle registration numbers so

that vehicles are not required to stop at the border.

Addressing the safety and security agenda through replicating existing levels of customs

cooperation and data-sharing.

Reducing administrative burdens primarily when importing through unilateral measures

of simplification and speeding up authorisations.

Some of these proposals are already in place for EU trade with other third countries.

With Switzerland and Norway the EU concluded bilateral agreements which entered into force

on 1 July 2009 that waive the obligation of traders to provide customs with the Summary

Declarations prior to import and export in bilateral trade which were introduced to improve

safety and security procedures. The EU has also signed agreements on supply chain security

with main partner countries that provide the legal basis for mutual recognition of AEOs. Most

of those agreements, e.g. with US, China, Japan or Canada, go beyond mutual recognition;

they focus on improving supply chain security, joint risk rules, creating joint standards

regarding security controls etc.

Looking at Norway in greater detail, Norway is not part of the EU’s Customs Union and does

not apply the EU’s common customs rules and tariffs. Norway is, however, involved in the

EU’s customs cooperation through Protocol 10 of the EEA Agreement. Norway has

signed a separate agreement with the EU in order to ensure that customs rules do not hamper

trade flows between Norway and the EU. The agreement waives the obligation to provide

information for security purposes prior to the import or export of goods to the EU and requires

Norway to apply customs security measures that are equivalent to those applied by the EU in


144

its trade with third countries. This has involved mutual recognition of the Authorised Economic

Operator (AEO) certification scheme and of systems of risk analysis and management. As a

result of the agreement with the EU, Norway is invited to participate as an observer in several

of the comitology committees under the EU’s Customs Policy Group.

The new customs partnership model with the EU would align the UK’s approach to the

customs border in a way that removes the need for a UK-EU27 customs border.

“One potential approach would involve the UK mirroring the EU’s requirements for imports

from the rest of the world where their final destination is the EU. This is of course

unprecedented as an approach and could be challenging to implement and we will look to

explore the principles of this with business and the EU.”

The customs partnership model would involve the UK operating an import regime that aligns

precisely with the EU27’s external customs border, for goods that will be consumed in the

EU27 market, even if they are part of a supply chain in the UK first. The UK would need to

apply the same tariffs as the EU27, and provide the same treatment for rules of origin for

those goods arriving in the UK and destined for the EU27. The customs paper admits the need

for:

“..a robust enforcement mechanism that ensured goods which had not complied with the

EU’s trade policy stayed in the UK. This could involve, for instance, a tracking mechanism,

where imports to the UK were tracked until they reached an end user, or a repayment

mechanism, where imports to the UK paid whichever was the higher of the UK’s or the EU’s

tariff rates and traders claimed a refund for the difference between the two rates when the

goods were sold to an end user in the country charging lower tariffs. Businesses in supply

chains would need to be able to track goods or pass the ability to claim a repayment along

their supply chain in order to benefit”.

Much of the early comment on the customs partnership model focused on the higher

administrative costs it would imply. Manufacturers and traders would be required to follow

imported goods through to the final consumer. In the case of integrated supply chains, it

would not only be UK firms that would be required to do this. Indeed, it is striking that the

customs position paper only discusses the UK perspective.

The biggest weakness of this proposal is that no one is sure how it might work. The

paper itself notes:

“We acknowledge this is an innovative and untested approach that would take time to

develop and implement. The Government is keen to explore this approach with businesses

and other stakeholders to understand the practical complexities involved in making it work

and assess which other approaches could have a similar effect, how they would work in

practice and whether they could achieve the Government’s objectives”.

As Mr Jon Thompson, Chief Executive and Permanent Secretary, HM Revenue and Customs,

put it in oral evidence to the House of Commons Treasury Select Committee on 14 September

2017: 22F

94

“Let us make this real. You bring something to Felixstowe where the contents need to be

split between those that are going to remain in the United Kingdom and those that are

going on onward transfer to the European Union. At that point you begin to have dual

systems for everything, whereas at the moment you have a single system. Therefore, that

requires not only us but everyone who is involved in that supply chain to run multiple

systems at the same time, because there may be different tariff regimes. Essentially, the

94 House of Commons Treasury Committee, “Oral evidence: Her Majesty's Revenue and Customs Annual Report and

Accounts”, HC 314.

https://clearlightcustoms.com/wp-content/uploads/2017/09/HMRC-Evidence-session-Treasury-Select-Committee-14-September-17.pdf

https://clearlightcustoms.com/wp-content/uploads/2017/09/HMRC-Evidence-session-Treasury-Select-Committee-14-September-17.pdf


145

new customs partnership means we are running the EU tariff system at the UK border. That

is why it is quite innovative and different, and it requires new technology.”

In summary, trade facilitation measures can do a lot to reduce the time required to cross

borders and to make it as easy as possible for traders to manage the necessary paper work

(Grainger 2017; Owen, Shepheard, and Stojanovic 2017). However, only in the context of the

EU single market and Customs Union can they be fully removed.

2.3.2. Free trade agreement

A free trade agreement (FTA) is the simplest possible improvement on WTO terms.

An FTA would reduce or eliminate tariffs on trade in goods between the two parties. It would

be notified to the WTO under GATT Article XXIV which permits discriminatory trade

arrangements in the case of FTAs and customs unions which cover substantially all trade. Both

parties would maintain their autonomy with respect to their trade policy vis a vis third

countries, i.e. their applied MFN tariff schedule, the administration of tariff rate quota (TRQ)

preferences for agricultural products, the use of trade defence measures such as anti-dumping

and countervailing duties, and the ability to enter into separate FTAs with third countries. 23 F

95

Although FTAs remove one of the additional trade costs that trade on WTO terms

would incur, this is at the cost of introducing a further additional cost, namely, the

need to check that a traded product seeking to enter the importing country with a preferential

duty has actually originated in the exporting country and is not simply a third country’s export

transhipped through the exporting country in order to benefit from the tariff preference. Rules

of origin (ROOs) determine whether a particular import consignment should be treated as

originating in the exporting country (and thus eligible for the preferential duty) or originates

in some third country and is simply using the exporting country as a country of transit. This

requires the product either to be wholly obtained from the territory of the exporting country

or to have undergone ‘sufficient working or processing’ to qualify as originating.

The EU tariff schedule uses four different criteria to determine whether ‘sufficient processing’

has taken place. These are: i) a change of tariff heading (e.g. chocolate spread will originate

in the UK if it is made from imported materials of any other heading); ii) a minimum value

added (e.g. for passenger cars, the value of all the non-originating materials used to

manufacture the car may not exceed 40% of the total value of the product); iii) specific

processing or working requirements or iv) a combination of the first three requirements (e.g.

in the case of chocolate spreads, an additional requirement is that no more than 30% of the

ex-works value of the product can be accounted for by the value of sugar). 24F

96

Cumulation is the term used to describe a system that allows originating products

of country A to be further processed or added to products originating in country B,

just as if they had originated in country B. The resulting product would have the origin of

country B. It can only be applied between countries operating with identical origin rules. A UK-

EU27 FTA could allow bilateral cumulation, meaning that when a UK car producer imports

intermediate parts from the EU to manufacture a car, those intermediate parts will be

considered as originating in the UK when calculating the maximum threshold for non-

originating materials (i.e. 40%, as explained above).

The UK could join the Regional Convention on Pan-Euro-Mediterranean preferential

rules of origin (PEM). As the Convention is based on a network of FTAs with identical origin

protocols, joining it allows parties to apply a principle of diagonal cumulation when determining

95 However, parties to an FTA can agree to jointly negotiate FTAs with third countries, as in the case of the European

Free Trade Association (EFTA). Today, EFTA has 27 FTAs covering 38 countries and territories outside the EU. 96 The EU rules on preferential origin arrangements are summarised on the DG TRADE website “Common provisions”.

http://www.efta.int/free-trade

https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/general-aspects-preferential-origin/common-provisions_en


146

the country of origin of goods. Diagonal cumulation would go further than bilateral cumulation

in that originating materials from any party to the Convention would be deemed to originate

in the UK for the purpose of calculating the origin of a product exported from the UK to the

EU27 (or vice versa). Currently, the parties of the Convention include 42 countries: the EU,

EFTA states, Faroe Islands, the Republic of Moldova, participants in the Barcelona Process

(Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria, Tunisia and Turkey), and

participants in the EU's Stabilisation and Association Process (Albania, Bosnia and

Herzegovina, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Kosovo).

Under EU rules, to claim preferential treatment under an FTA, importers must

present a movement certificate known as EUR.1 or, in certain cases, an invoice

declaration. A movement certificate EUR.1 will be issued by the customs authorities of the

exporting country following requests by exporters, while an invoice declaration can be made

by an approved exporter, or by any exporter with a shipment consisting of originating products

whose value does not exceed a certain amount. The customs authorities can grant the status

of approved exporter to any frequent exporter subject to conditions they consider appropriate;

and withdraw it at any time.

For goods with low preferential margins or which are parts of complex supply chains,

the costs of showing compliance with rules of origin and requesting the tariff

preference are often seen as too high to make it worthwhile. The EU is anyway trying

to reduce the costs of complying with ROOs by moving away from the use of paper certificates

to certify origin to a system of self-certification by exporters. It is phasing in the REX

(Registered Exporter) system from 1 January 2017, initially for exporters in developing

countries benefiting from the Generalised System of Preferences and later for other FTAs.

Exporters in beneficiary countries will be invited to become registered for REX with the national

authority of the country in which they are established. Once registered they will be entitled to

issue ‘Statements on Origin’ on their commercial documents such as invoice declarations

without any limit on the value of the goods covered. Presumably, REX would be the basis for

any system of self-certification for UK exporters following an eventual UK-EU27 FTA (the

Canadian CETA is the first FTA to which the REX procedures will apply).

There are other drawbacks of FTAs. FTAs only cover goods but not services, and even

for goods not all goods may benefit from a preferential duty, and not all preferential

duties may be zero. In the case of sensitive products, such as agricultural products,

preferential access may be limited to specific volumes of imports under a TRQ (meaning that

exports above this volume are required to pay the full MFN applied duty) and may be subject

to safeguard clauses permitting the withdrawal of the concession if there is a surge in import

volumes.

For EU27 agricultural producers, a particular concern with an FTA which gave tariff-

free access under all agricultural tariff lines would be the potential for trade

displacement. This could occur if the UK were to open up its market to third country produce

(e.g. lamb) either by lowering its MFN applied tariffs or by entering into FTAs with third country

competitive agricultural exporters. While this third country produce would not receive the

benefit of the preferential duty because it does not originate in the UK, the UK could increase

its imports from third countries to meet its domestic demand while diverting more of its own

production to the higher-priced EU27 market, hence the notion of trade displacement. 25F

97 If the

UK did not enter a customs union with the EU27 which would avoid this problem, this could

lead to pressure from producer groups within the EU27 to limit imports from the UK to the

97 Trade displacement would be perfectly legitimate and can be distinguished from trade deflection, which would be

the attempt by third country exporters to use the UK as a ‘back door’ into the higher-priced EU market.


147

volumes currently imported using TRQs. If this happened, the UK would be likely to insist on

limiting EU exports to its market in return.

FTAs also require the maintenance of customs posts at borders even if there is 100%

coverage of tariff lines. This is not only because of the need to check rules of origin, but

also because of the many other checks that need to be performed at the border, including the

payment of appropriate taxes and excises, security and safety checks and compliance with

regulatory standards. A customs agreement can help to minimise some of these costs and the

time required to cross borders, as discussed above, but they cannot be completely avoided

even in an FTA scenario. Avoiding regulatory checks requires a deeper level of integration and

is discussed in the next section.

2.3.3. FTA+ arrangement with regulatory cooperation

An FTA could be combined with various forms of regulatory co-operation. Regulatory

co-operation is a way of minimising or eliminating regulatory checks at borders. There are

different levels of co-operation depending on the degree of integration the trading partners

wish to achieve. Regulatory co-operation is usually implemented through Mutual Recognition

Agreements (MRAs). 26 F

98

Harmonisation of regulations means that both parties agree to use the same

regulatory standards. This is the approach used in the EU’s Association Agreements

with the three eastern neighbours Ukraine, Georgia and Moldova with respect to

technical standards for industrial products. Agreements on Conformity Assessment and

Acceptance of Industrial Products (ACAAs) are a specific type of MRA based on the full

alignment of the legislative system, including standards, and implementing

infrastructure of the country concerned with those of the EU.

Recognition of the equivalence of regulations is based on the fact that

regulatory goals, e.g., in relation to health and food quality, in practice may be

fulfilled by the use of different kinds of measures. This allows trade barriers to be

removed and imported products can be accepted on the basis that they fulfil the

relevant regulatory objectives – even though regulatory differences persist. Equivalence

assessment is an obligation since 1995 under the WTO Agreement on Sanitary and

Phytosanitary Standards (SPS) (Article 4) which requires that “Members shall accept

…measures of other Members as equivalent, even if these measures differ from their

own …if the exporting Member objectively demonstrates to the importing Member that

its measures achieve the importing Member's appropriate level of sanitary or

phytosanitary protection. Members shall, upon request, enter into consultations with

the aim of achieving …agreements on recognition of the equivalence”. The EU has

negotiated only a small number of MRAs which recognise other countries’ standards as

equivalent. Food trade across the US-Canadian border is facilitated because the U.S.

Food and Drug Administration signed an MRA with the Canadian Food Inspection Agency

and the Department of Health Canada recognizing each other’s food safety systems as

comparable to each other. 27F

99

Mutual recognition can simply mean that two or more parties mutually accept

each other’s conformity assessment procedures, i.e., the process by which

products are evaluated for compliance with the rules. Traditional MRAs enable the

competent authority nominated by one party to certify products for access to the other

party’s market, according to the other party’s standards and legislation. No regulatory

98 Mutual recognition agreements that facilitate access to markets between the EU and non-EU countries should not

be confused with the principle of mutual recognition in the EU single market which ensures market access for

products that are not subject to EU harmonisation. 99 U.S. Food and Drug Administration, “FDA Recognizes Canada as Having a Comparable Food Safety System to the

U.S.”, May 4 2016.


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convergence is implied by a traditional MRA. In other words, there is no implication that

the regulations imposed on products by the parties are to be brought into alignment at

any stage. The EU has many MRAs in the SPS area under which it agrees to recognise

the validity of certificates issued by the competent authority in the exporting country

stating compliance with EU standards, in return for the exporting country agreeing to

regular auditing of its practices and procedures.

The most limited form of regulatory co-operation would be to agree to

exchange information on regulatory standards and to provide the opportunity for

stakeholders and regulatory authorities in one country to comment on proposed new or

revised standards in the other country. Provisions for information exchange and joint

activities between regulatory authorities are increasingly included in FTAs.

The UK has proposed that the UK and the EU27 should aim at regulatory equivalence

on agri-food measures after Brexit (HM Government 2017c). Although this proposal was

put forward in the context of avoiding a hard border on the island of Ireland, it would apply to

all UK-EU27 trade after Brexit.

“One option for achieving our objectives could be regulatory equivalence on agri-food

measures, where the UK and the EU agree to achieve the same outcome and high

standards, with scope for flexibility in relation to the method for achieving this. An

agreement on regulatory equivalence for agri-food, including regulatory cooperation and

dispute resolution mechanisms, would allow the UK and the EU to manage the process of

ensuring ongoing equivalence in regulatory outcomes following the UK’s withdrawal from

the EU. Providing the UK and the EU could reach a sufficiently deep agreement, this

approach could ensure that there would be no requirement for any SPS or related checks

for agri-food products at the border between Northern Ireland and Ireland.”

Regulatory co-operation including the recognition of regulatory equivalence is a useful and

effective way of minimising trade barriers due to differences in regulatory standards. The EU

has signed MRAs for organic farming standards with a number of countries, as well as MRAs

covering SPS measures. 28F

100 These agreements often require lengthy negotiations, and

demonstrating the equivalence of different standards can be difficult. Achieving the degree

of regulatory equivalence sought by the UK while still allowing the UK regulatory

autonomy in the SPS area would be a difficult balancing act.

2.3.4. Customs union

A customs union represents a higher level of economic integration because, in this

arrangement, the parties agree to maintain a common external trade policy vis á vis

third countries. Thus, both parties agree to apply the same tariffs, to share the same

agricultural TRQs, and to jointly conclude FTAs with third countries. This option further reduces

the costs of customs clearance because checks on the origin of goods are no longer necessary

– imported goods entering either of the parties will have paid the same tariff so there is no

danger of transhipment to avoid the payment of a higher duty in one of the partners. However,

border checks would still need to be undertaken for regulatory compliance because there is

no presumption in a pure customs union model that the participating countries have the same

regulatory standards. VAT payments and excise duties would also need to be paid on crossing

the frontier. If there were any exceptions of any kind, customs checks would also be required

for those goods.

Another advantage of a customs union for EU agri-food exporters is that it would

retain the residual preferential trade transfers on exports to the UK, to the extent that

100 In addition to SPS provisions in FTAs, DG SANTE has this list of stand-alone Sanitary and Phytosanitary

Agreements.

https://ec.europa.eu/food/safety/international_affairs/trade/agreements_en

https://ec.europa.eu/food/safety/international_affairs/trade/agreements_en


149

prices paid by consumers within the customs union are higher than world market prices

because of the Common External Tariff. This advantage of a customs union to EU exporters

would, of course, be seen as a disadvantage by the UK because it would represent a

deadweight cost for the UK economy. It would also keep food prices higher in the UK than

they might otherwise be if the UK were able to import at world market prices. We have

previously noted that the size of this preferential trade transfer is now much smaller than it

was in the past.

Under the current rules for EU own resources, tariff revenue on imported goods is considered

an EU own resource and is paid directly to the EU budget (less an amount equivalent to 25%

of the revenue collected which can be retained by the importing country to offset

administrative costs). Under a stand-alone customs union between the UK and the

EU27, it would be open to each party to decide that tariff revenue collected should

remain with the importing country (as is the case with the EU-Turkey customs union) or

be divided up in some other proportion. Allowing the UK to keep the tariff revenue collected

on imports from outside the EU27 would eliminate the transfer that the UK currently makes

when this revenue is transferred to the EU budget. However, the UK would still make a transfer

through the preferential trade transfers on imports from the EU27 itself.

2.3.5. Customs union with regulatory cooperation

As with a free trade agreement, it is possible to envisage a customs union combined with

elements of regulatory cooperation. From an agri-food perspective, this would again require

harmonisation or close equivalence between the food, sanitary and phytosanitary standards

in the UK and the EU27. The same concerns as previously discussed would arise: on the UK

side, the possible loss of regulatory autonomy; on the EU27 side, the possible dangers of

‘cherry-picking’ if the UK were to opt for regulatory coherence in some sectors but not in

others.

2.3.6. A regulatory union

A regulatory union is one in which both parties agree to align their regulations on a

set of common standards. As the EU single market demonstrates, this does not require

agreement on a set of harmonised standards. In the single market, there is agreement on a

set of high minimum standards and after that the principle of mutual recognition applies. Any

product lawfully marketed in one Member State can be sold in another Member State. Member

States can introduce higher standards for their own producers, but they cannot exclude the

products of other Member States which do not meet those standards provided they are lawfully

marketed in the other Member State. Crucial to the operation of a regulatory union is a high

level of protection in the basic standards that are common to all, a high degree of trust and

confidence in the competence of the other partners to ensure compliance with the rules, as

well as a dispute settlement mechanism which ensures consistent policing of those rules.

A customs union with full and consistent adoption of the EU regulatory acquis (a

regulatory union) would replicate the status quo with respect to trading conditions.

However, because the UK would no longer be an EU Member State, it would have lost its ability

to influence the shape of EU regulations through its voice in the Council or Ministers and

through its MEPs in the European Parliament. Although this option would be very attractive to

EU exporters, for obvious reasons, it has no attractions for the UK as it would imply no

extension of its regulatory or trade policy autonomy despite the fact that it had exited the EU.

2.3.7. Northern Ireland

Both the UK and the EU27 recognise that avoiding a hard border on the island of Ireland will

require flexible and imaginative solutions. The UK government has set out some ideas to

avoid a hard border in its Northern Ireland-Ireland position paper ((HM Government 2017c).


150

This outlines nine principles on which to base a future customs arrangement at the Northern

Ireland-Ireland land border. These include aiming to avoid any physical border infrastructure

on either side of the border between Northern Ireland and Ireland, but also preventing new

barriers to doing business within the UK, including between Northern Ireland and Great Britain.

The UK Government insists that the answer to avoiding a hard border between Northern

Ireland and Ireland cannot be to impose a new customs border between Northern Ireland and

Great Britain. Instead, it points to a number of examples where the EU has set aside its normal

regulations and codes set out in EU law in order to recognise the circumstances of certain

border areas. Its view is that devising a way forward on the Irish side of the land border will

require similar derogations that go beyond current EU frameworks to maintain the absence of

a hard border after Brexit.

In addition to the trade facilitation measures it proposed under its highly streamlined customs

arrangement in its customs position paper, the UK believes it would be necessary to go still

further to agree specific facilitations for the Northern Ireland-Ireland land border. The UK has

proposed a cross-border trade exemption that acknowledges that many of the

movements of goods across the land border are by smaller traders operating in a

local economy. They cannot be properly categorised or treated as economically significant

international trade. The cross-border trade exemption would ensure that smaller traders could

continue to move goods with no new requirements in relation to customs processes at the

land border. It estimates that, in 2015, over 80% of north to south trade was carried out by

micro, small and medium-sized businesses. For businesses not eligible for an exemption, the

UK proposes that administrative processes could be very significantly streamlined, including

for ‘trusted traders’ on either side of the border, which could allow for simplified customs

procedures. There has been no formal response as yet to this suggestion from the EU27 side.

Guy Verhofstadt, the European Parliament’s Brexit coordinator and chair of its Brexit Steering

Group, in an address to the Irish Oireachtas noted that most of the people he met along

the Irish border believed that the unique solution involved the UK staying in both

the single market and the customs union. Acknowledging that the UK has ruled out that

option, he observed that “the resolution of this border issue is entirely the responsibility of the

United Kingdom. It is for them to come up with a workable solution.. [that] doesn't

compromise the Irish membership and the integrity of the single market and the customs

union.”29F

101

2.3.8. Facilitating the UK land bridge

The UK proposes to address the transit of goods to and from Ireland to the rest of

the EU via the UK land bridge by joining the Common Transit Convention. This would

allow Irish exporters to use the land bridge across the UK to access continental EU markets

without having to ‘enter’ the UK for customs purposes. It could also facilitate the movement

of goods from one part of Ireland to another when the quickest route goes through Northern

Ireland. In turn, it would allow exports from Northern Ireland to cross through Ireland for

onward delivery to markets outside the EU without having first to ‘enter’ the EU for customs

purposes. The Transit Convention also permits the use of the SAD as a transit document to

cover movement of goods between the EU and the other signatories and between these

signatories themselves.

But using the Common Transit Convention is far from frictionless trade. Making use

of the transit system incurs administrative and financial costs as well as restrictions on

movements. 30F

102 Transit movements must be declared, accepted and registered before the

movement takes place. This includes a deadline for delivering the goods at destination as well

as prescribing the route that will be followed by the haulier. The requirement to use sealed

101 Verhofstadt, G., “Speech to Members of the Houses of Oireacthas.” Dublin, 21 September 2017. 102 DG TAXUD has a 674-page document which describes transit procedures in greater detail.

https://ec.europa.eu/taxation_customs/sites/taxation/files/transit_manual_en.pdf.


151

trucks would rule out the possibility of ‘groupage’ which means logistics firms can off-load

pallets or part-loads on their way through the UK which may help to increase capacity

utilisation of lorries and thus keep freight rates low. The Transit Convention approach would

also not seem appropriate for the movement of goods from one part of Ireland to another

where the shortest route was through Northern Ireland and where in most cases the transit

journey would be less than one hour.

2.4. Models of the future relationship

Different trade arrangements can potentially reduce some or all of the trade frictions that

would arise under a ‘hard’ Brexit with trade on MFN terms. The EU has entered into a wide

range of trade arrangements with different countries which differ in their scope and ambition,

and which might provide a template for the future trade relationship between the UK and the

EU27. Reference is made to different models which are conveniently summarised by

association with a country which exemplifies that relationship. A number of possible models

are set out in Figure 4. It is suggested that the overall level of integration increases as we

move from left to right across the table, but this is not necessarily the case in all dimensions.

The discussion highlights in particular the treatment of agri-food trade in these different

agreements.

It must be stressed that the UK government has explicitly ruled out the Canadian, Turkey and

Norway models but they are discussed here for the sake of completeness. Mrs May, in her

Florence speech, indicated that no existing EU trade arrangement would suit the UK. This is

because (a) of the size and significance of the economic and trade relationships between the

two parties (b) the fact that the UK would be negotiating a trade agreement on the basis that

it had exactly the same regulatory standards (although this argument overlooks the fact that

the argument for withdrawal is that the UK wishes to have the ability to change these

standards in the future). The UK’s preferred option is a bilateral FTA which gives it

most if not all of the benefits of the single market yet which meets the UK’s four red

lines. The EU’s chief negotiator Michel Barnier has ruled out this option on the grounds

that third countries cannot have the same rights and benefits, since they are not

subject to the same obligations.31F

103

103 “Introductory comments by Michel Barnier”, European Commission website, 6 December 2016.

https://ec.europa.eu/info/news/introductory-comments-michel-barnier-2016-dec-06_en


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Figure 19: Main elements of different EU trade arrangements

Element ‘Canada’ ‘Turkey’ ‘Ukraine’ ‘Swiss’ ‘Norway’

< Less ………………………………………..Degree of integration………………………………….More >

Non-

agricultural

trade with

EU

Liberalised for

goods plus

services

commitments

Liberalised

for goods

On way to being

liberalised for

goods and

services

Goods and

some

services

liberalised

Goods and

services

liberalised

Agricultural

trade with

EU

Partial

liberalisation

Partial

liberalisation

Partial

liberalisation

Partial

liberalisation

Partial

liberalisation

Trade with

third

countries

No impact Turkey must

apply EU

FTAs

No impact No impact No impact

Regulatory

coherence

Limited Aspiration Aspiration High Complete

Agricultural

policy

Unilateral CAP

aspiration

CAP aspiration* Unilateral Unilateral

Freedom of

movement

No No No Yes Yes

Budget

contributions

No No No Yes Yes

Dispute

settlement

WTO-like Limited WTO-like Limited Effective

Source: Own presentation. * The Georgian DCFTA has no aspiration that Georgia will adopt CAP regulations.

2.4.1. Canada

Traditionally, EU trade agreements were mainly about reducing tariffs on trade in goods. With

changes in production processes leading to the emergence of global supply chains, the growth

in the importance of services trade and the emergence of new platforms such as the digital

economy, other barriers to trade have become more important. As a result, the EU now seeks

deeper trade agreements (called Deep and Comprehensive Free Trade Agreements) which

address a wider range of issues. The objectives were set out in the Commission’s

Communication Trade, Growth and World Affairs as follows: “Cutting tariffs on industrial and

agricultural goods is still important, but the brunt of the challenge lies elsewhere. What will

make a bigger difference is market access for services and investment, opening public

procurement, better agreements on and enforcement of protection of IPR, unrestricted supply

of raw materials and energy, and, not in the least, overcoming regulatory barriers including

via the promotion of international standards. Through trade, we should also promote the

greening of the world economy and decent work” (DG TRADE 2010). The Comprehensive

Economic and Trade Agreement (CETA) with Canada is a representative example of this type

of agreement. 32F

104

The tariff reduction package is one of the most comprehensive the EU has achieved in the

context of an FTA; overall, tariffs for 98.6% of all Canadian tariff lines and 98.7% of all EU

tariff lines will ultimately be fully eliminated. For a few sensitive agricultural products,

there will be a special treatment based on TRQs or an exclusion from any tariff

reduction. This preferential access is without any prejudice to the rules and regulations that

the products in question need to satisfy on the respective import market (technical, sanitary

or phytosanitary rules for the security and the protection of the consumer, the user or the

environment, including food safety and labelling requirements). These rules remain untouched

by CETA.

104 This description of CETA provisions is based on DG TRADE, “CETA – Summary of the final negotiating results”,

2016.

https://trade.ec.europa.eu/doclib/docs/2014/december/tradoc_152982.pdf


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On technical barriers to trade, both sides agreed to further strengthen the links and

cooperation between their standard setting bodies as well as their testing, certification and

accreditation organisations. A separate protocol improves the recognition of conformity

assessment between the parties. It provides for a mechanism by which EU certification bodies

will be allowed to certify for the Canadian market according to Canadian technical regulations

and vice-versa.

There is a limited extension of the rights and obligations of the EU and of Canada

under the WTO SPS Agreement. As regards meats and meat products, the existing EU-

Canada Veterinary Agreement was integrated into CETA. As additional elements of trade

facilitation, the parties agreed to simplify the approval process for exporting establishments

and work on further elements aimed at minimising trade restrictions in the event of a disease

outbreak. In the area of plant health, CETA sets up new procedures that will facilitate the

approval process of plants, fruit and vegetables by Canada. Overall, CETA will streamline

approval processes and improve predictability of trade in animal and plant products but it does

not amend either the European or the Canadian SPS rules. All products need to fully comply

with applicable sanitary and phytosanitary standards of the importing Party.

CETA represents a minimalist model for future UK-EU27 trade relations. It would enable the

elimination of tariffs and mutual recognition for conformity assessment with each other’s

standards, but many of the additional trade costs identified in a ‘hard’ Brexit scenario would

remain. Dispute settlement is limited to a state-to-state dispute settlement mechanism very

similar to the WTO panel procedure.

2.4.2. Turkey

An incomplete customs union between the EU and Turkey was created on 1 January

1996, guaranteeing free circulation of industrial goods and processed agricultural

products. Tariffs are eliminated on these covered goods and Turkey agreed to adopt the

Union’s Common External Tariff. However, both sides can introduce anti-dumping duties on

each other and on third countries. The customs union does not deal with agriculture or services

and also has some gaps in its coverage of manufactures. It also has a very limited mechanism

for dealing with disputes.

There is a key asymmetry in the design of the customs union in that the EU is permitted

to negotiate FTAs with third countries, but Turkey is not permitted a seat at the negotiations

because it is not an EU member. This situation is exacerbated by the fact that Turkey has

been unable to obtain the same agreement from trading partners in parallel negotiations. This

means that Turkey has to apply external tariffs at the level negotiated by the EU but does not

gain reciprocal access to the third country’s market in return. This asymmetry is potentially

very costly for both parties as it risks the introduction of origin controls, the absence of which

is a key source of the benefits from the customs union (World Bank 2014).

Although Turkey is not an EU member state, it has the obligation to adopt the EU

acquis in areas related to the customs union. This includes rules and regulations in areas

such as intellectual and industrial property rights, competition rules, state aid, the custom

code and administrative cooperation. The EU agreed to accept without additional conformity

assessment checks Turkish goods for which relevant EU legislation had been incorporated,

although this did not happen until 2006. 33F

105 However, the transposition of new regulations

suffers from outdated procedures. The commitment to approximation of laws under the

customs union agreement should be seen as part of the more general alignment process as

part of Turkey’s application for EU membership. Although Turkey has made considerable

105 Holmes, P., “Staying in the Customs Union: Neither Soft Nor Simple”, 11 July 2017.

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strides in implementing the EU food safety, veterinary and plant health acquis, Turkish food

exports are not exempt from EU border checks. However, for some products (e.g. fruits and

vegetables, dairy) the EU has begun to recognise certificates issued by the Turkish authorities

that export produce complies with EU standards on the same basis as for other third countries.

Trade in agricultural products is addressed through a bilateral agriculture and

fisheries agreement which entered into force in 1998, and which provided for a 22-year

period for Turkey to “adjust its agricultural policy with a view to adopting, at the end of that

period, those measures of the common agricultural policy which must be applied in Turkey if

free movement of agricultural products between it and the Community is to be achieved.”

Pending the fulfilment of these conditions, the EU and Turkey grant each other preferential

treatment in agricultural goods and fishery products.

The customs union does not cover services, and particularly road transport services.

In the EU, bilateral road transport agreements including quota negotiation remain the

responsibility of the individual EU Member States. By limiting the number of Turkish-registered

vehicles that can carry goods in their territory, EU Member States set limits on Turkish goods

that can be transported to the EU by Turkish road transport operators (although they can still

be carried by EU road transport operators). This raises costs if the most efficient transport

operator can no longer be used.

The customs union with Turkey is the only example where the EU has entered into a customs

union arrangement with a third country of significant size (the customs unions with Andorra

and San Marino are discounted in this respect). It would have limited attractions as a model

for UK-EU27 trade relations in the future. The asymmetries in Turkish participation in decisions

stem from the initial expectation that the customs union would be a transitional arrangement

while Turkey moved towards full EU membership. The agreement goes further than CETA in

that it foresees the movement of goods between the two parties not on the basis of originating

status but on the fact that they comply with provisions on free circulation. In the case of agri-

food products, the requirement for this is that Turkey aligns its food safety, veterinary and

plant health legislation with the Union acquis, and that it adopts those elements of the CAP

which are necessary to ensure free movement can be achieved. As these requirements are

not yet in place, trade liberalisation in agriculture is limited to some preferential concessions.

Agri-food products traded between the EU and Turkey must comply with the standard rules

for third countries.

2.4.3. Ukraine

The European Parliament in its Brexit resolution of 5 April 2016 specifically noted that an

association agreement could be an appropriate model for the future UK-EU27 trade

relationship. Provision for Association Agreements is set out in Article 217 TFEU which ordains

that the Union “shall develop a special relationship with neighbouring countries, aiming to

establish an area of prosperity and good neighbourliness, founded on the values of the Union

and characterised by close and peaceful relations based on cooperation”. In 2014 the EU

concluded an association agreement with the Ukraine (along with similar agreements with

Georgia and Moldova) which some observers believe could be a useful template for a future

UK-EU27 agreement (Duff 2016; Emerson 2017).

The Ukraine’s association agreement goes beyond a trade agreement only as it provides for

future political cooperation in the field of justice and home affairs, foreign, security and

defence policies as well as specifying an elaborate institutional architecture. However, at its

heart is a Deep and Comprehensive Free Trade Agreement in which three of the four principles

of freedom of movement are respected. There is mostly tariff free access for goods, passports


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for services, and customs cooperation. The movement of labour is subject to work permits

against the backdrop of visa liberalisation (Duff, 2016).

Trade in agricultural goods has been liberalised, but for sensitive commodities the tariff

preferences are limited by TRQs. The agreement also covers agricultural policy, where the

parties “shall cooperate to promote agricultural and rural policies, in particular through

progressive convergence of policies and legislation”. The parties agree to support “gradual

approximation to relevant EU laws and standards”, and a list of EU regulations which broadly

govern the EU’s Common Agricultural Policy is attached. However, no timetables are stipulated

for approximation. The view of Emerson and Movchan (2016) is that “the overall message is

that Ukraine retains much flexibility over how far or how fast to replicate elements of EU farm

policy”. The companion DCFTA signed with Georgia does not require approximation of EU

agricultural policy yet notably provides for full liberalisation of agricultural trade between the

two parties.

Ukraine will progressively adapt its technical regulations and standards to those of the EU.

Future negotiation of an Agreement on Conformity Assessment and Acceptance of Industrial

Products (ACAA) will provide that, in the specific sectors, covered trade between the parties

will take place under the same conditions as between EU Member States. The main treaty text

of each chapter is accompanied by an annex that lists the EU regulations and directives with

which Ukraine agrees to comply, mostly taking these laws in their entirety, but in some cases

identifying only those articles that apply, or may be excluded (Emerson 2017). DG TRADE

estimates that harmonisation and/or mutual recognition of technical standards should cut

existing non-tariff barriers in the agri-food sector by half compared to 2004 (DG TRADE 2013).

Ukraine is also committed to aligning its SPS and animal welfare legislation with that

of the EU. The SPS chapter deals with verification procedures, listing of establishments, levels

of checks, and settlement of trade problems. The Agreement did not itself define the list of

laws to be approximated, but instead required Ukraine to submit a Comprehensive Strategy

for the implementation of EU SPS standards within three months of its entry into force. In

February 2016 agreement was reached between Ukraine and the European Commission on

the contents of the Comprehensive Strategy, which is a list of roughly 255 EU regulations and

directives (Emerson and Movchan 2016). Rules are established for recognising the equivalence

of measures taken by Ukraine with those of the EU. The process should be launched by the

exporting party based on the “objective demonstration of equivalence” and the “objective

assessment of this demonstration” by the importing party. Where equivalence is recognised

there will be a reduction of physical checks at frontiers and simplified procedures.

Dispute settlement follows the state-to-state WTO panel approach but with faster procedures.

There is a procedure that obliges the arbitration panel to ask the Court of Justice of the

European Union (CJEU) for a binding preliminary ruling when there is a dispute concerning the

interpretation and application of EU law (i.e. EU legislation annexed to the Agreement). This

procedure aims to ensure a uniform interpretation and application of the Agreement’s annexed

EU legislation without jeopardising the exclusive jurisdiction of the CJEU to interpret EU law.

The ‘Ukraine model’ presupposes a high degree of integration, yet allows for flexibility in

deciding the areas where common standards would apply, it does not require acceptance of

free movement and CJEU rulings do not have direct effect. Unlike the Turkish model, there is

no presumption that Ukraine is a candidate country for EU membership. Advocates of this

model believe it could be developed as a template for a future UK-EU27 agreement

in ways that meet both the UK’s and EU27’s red lines. The EU, of course, might look

very differently at extending the provisions of the Ukraine DCFTA to a much more developed

economy.


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2.4.4. Switzerland

Relations between the EU and Switzerland are based on more than 120 bilateral

agreements,34F

106 including a free trade agreement in 1972 and two major series of sectoral

bilateral agreements that aligned a large portion of Swiss law with that of the EU at the time

of signing.35F

107 The first set of sectoral agreements (known as Bilaterals I) was signed in 1999

and entered into force in 2002. These seven agreements cover the issues of free movement

and mutual market opening including in agriculture. These agreements are linked by a

‘guillotine clause’ meaning that the suspension, denunciation or non-renewal of one agreement

causes the whole package to lapse. This became important following the Swiss referendum

vote in 2014 to restrict the free movement of persons from the EU. A further set of sectoral

agreements (Bilaterals II) was signed in 2004 and entered into force in 2005. These

agreements extended cooperation on asylum and free travel within the Schengen borders as

well as to new areas such as environment and taxation. These agreements give Switzerland

effective membership of the EU single market for goods. 36F

108 In contrast to the EEA Agreement,

the sectoral agreements between Switzerland and the EU do not cover the free movement of

services (except for some aspects such as civil aviation and overland transport or direct

insurance for damage). In return, the Swiss have agreed to make budgetary transfers to the

less prosperous EU Member States as a contribution to the economic and social cohesion of

the single market.

The bilateral Agreement on Agriculture between Switzerland and the EU, which regulates trade

of basic agricultural products, entered into force in 2002. Contrary to the FTA for industrial

products, this bilateral agreement does not create a free trade area; instead mutual market

access is improved by reducing tariffs and non-tariff barriers to trade for products of particular

interest to the EU and Switzerland (mainly fruits and vegetables, cheese, and meat

specialities). 37F

109

Switzerland maintains its own trade policy and its ability to enter into FTAs with third countries.

Goods passing between Switzerland and the EU must still pass through customs clearance to

check that documentation is in order and that the goods are what they say they are. However,

the bilateral Agreement on Agriculture simplifies trade in the agricultural sector by

reducing or even eliminating non-tariff barriers to trade. Since 2009, Switzerland and

the EU have formed a common veterinary area without veterinary controls on animals and

products of animal origin (extended in 2012 to Norway and Iceland). Switzerland applies the

same controls at its borders as does the EU. Certain technical regulations in the areas of plant

health, animal feed, seeds, organic farming, wine and spirits as well as quality norms for fruit

and vegetables are mutually recognized as being equivalent. Switzerland has introduced a

new General Food Law Revision which came into force on 1 May 2017 and which aligns the

majority of Swiss food law with EU food law.

From the EU perspective, this arrangement based on a network of bilateral agreements has a

number of disadvantages. Unlike the EEA Agreement, the nature of the bilateral agreements

with Switzerland is static, given that there are no proper mechanisms to adapt the agreements

to evolving EU legislation. EU law is adopted by Switzerland based on the dates of signature

106 For the full list of agreements, see Swiss Confederation, Department for European Affairs, “Liste der Abkommen

Schweiz - Europäische Union, in Kraft am 1. Januar 2017”. 107 For a review, see European Parliament, Fact Sheet “The European Economic Area (EEA), Switzerland and the

North”, June 2017. 108 Strictly, only EU Member States can be members of the single market. However, the EFTA members of the

European Economic Area are also often regarded as members, since they have a level of access to the single

market similar to that enjoyed by EU members. Similarly, Switzerland has a high degree of access to the single

market in goods without being an EU member (House of Commons International Trade Committee, 2017). 109 Swiss Confederation Federal Office for Agriculture, “Agreement on Agriculture”.

https://www.eda.admin.ch/content/dam/dea/de/documents/publikationen_dea/accords-liste_de.pdf

https://www.eda.admin.ch/content/dam/dea/de/documents/publikationen_dea/accords-liste_de.pdf

http://www.europarl.europa.eu/atyourservice/en/displayFtu.html?ftuId=FTU_6.5.3.html


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of the agreements; although in some cases adaptations can be made by Joint Committees.

There is also an absence of surveillance and an efficient dispute settlement mechanism. For

some agreements, the case law of the CJEU is treated as binding until the date of signature,

but not beyond. The EU has therefore insisted that it will not allow Switzerland any

further single market access (e.g. as regards electricity) without a framework

institutional agreement to resolve these problems. EU-Swiss negotiations for a

framework institutional agreement were launched on 22 May 2014. 38F

110 Switzerland is resisting

EU pressure to agree a framework agreement emphasising that the bilateral path allows the

country to prosper while maintaining its independence. 39F

111 Negotiations on the framework

agreement are continuing. Because of these institutional deficiencies, it is unlikely that the EU

would be prepared to govern its future trade relations with the UK under a similar network of

bilateral agreements.

2.4.5. Norway

In this family of five models of EU trade relations with non-EU countries, the ‘Norway’ model

represents the model with the greatest degree of integration, although still less than

the single market within the EU Customs Union. Norway is an EFTA Member State and a

signatory to the European Economic Area agreement with the EU. EEA membership means

that there is free trade in goods and services between Norway and the EU with the exception

of agricultural trade. However, some liberalisation of agricultural trade has taken place under

a separate bilateral agreement between Norway and the EU which was updated and extended

in 2011.

The EEA agreement gives Norway membership of the single market by ensuring that

Norway adopts the EU’s regulatory acquis. It also incorporates the four freedoms of the

internal market (free movement of goods, people, services and capital) and related policies

(competition, transport, energy, and economic and monetary cooperation). The agreement

includes horizontal policies strictly related to the four freedoms: social policies (including

health and safety at work, labour law and the equal treatment of men and women); policies

on consumer protection, the environment, statistics and company law; and a number of

flanking policies, such as those relating to research and technological development, which are

not based on the EU acquis or legally binding acts, but are implemented through cooperation

activities.40F

112 Norway also makes a budget contribution to economic and social cohesion in the

single market through the EEA Financial Mechanism (referred to as EEA Grants and Norway

Grants).

Apart from excluding agricultural trade liberalisation with the EU, there are a

number of EU policy areas which the EEA Agreement does not cover. Norway continues

to have its own agricultural and fisheries policies. It is not a member of the EU customs area

so it has an independent trade policy (as a member of EFTA, Norway jointly negotiates free

trade agreements with third countries with the other EFTA Member States). The EEA

agreement does not cover broader co-operation in the areas of foreign and security policy,

nor justice and home affairs (although Norway like the other EFTA countries is part of the

Schengen area).

There are provisions specifying that the EFTA-EEA countries should be involved in preparing

EU acts but, although they can make representations, they do not participate in EU decision-

making. The EEA Joint Committee, composed of representatives of the EU and the three EFTA-

EEA states, meets monthly to decide which pieces of EU legislation should be incorporated into

the EEA. Legislation is formally incorporated by including the relevant acts in lists of protocols

110 The Council mandate for these negotiations is here. 111 Swiss Confederation, “Switzerland’s European policy – state of play”, accessed 20 October 2017. 112 European Parliament, Fact Sheet “The European Economic Area (EEA), Switzerland and the North”, June 2017.

http://www.consilium.europa.eu/en/press/press-releases/2014/05/pdf/negotiating-mandate-for-an-eu-switzerland-institutional-framework-agreement/

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and annexes to the EEA Agreement. Several thousand acts have been incorporated into the

EEA Agreement in this way. Once an EU act has been incorporated into the EEA Agreement,

it must be transposed into the national legislation of the EFTA-EEA countries (if this is required

under their national legislation). This may simply require a governmental decision, or it may

require parliamentary approval. Transposition and application are monitored by the EFTA

Surveillance Authority and the EFTA Court.

The EFTA Court is a key part of the institutional structure. It plays the same role in

enforcing the laws regulating the single market for the three EFTA-EEA states as the CJEU

does for the EU Member States. The EFTA Court judges are appointed by the EFTA-EEA states.

Because the relevant EU laws are transposed into national legislation, individuals and

businesses can defend their rights under these laws in national courts. The EFTA Court has a

particular role in adjudicating on cases brought by the EFTA Surveillance Authority against a

Member State, and actions concerning the settlement of disputes between two or more EFTA

states regarding the interpretation or application of the EEA Agreement. It can also issue

advisory opinions interpreting the EEA Agreement on the request of a national court of an

EFTA-EEA state.

The Norway model has the great advantage that it would keep the UK as a member of the

single market and thus avoid border controls for regulatory purposes. However, unless at the

same time the UK also entered into a customs union with the EU27, border controls would still

be required (as they are between Norway and Sweden, and between Germany/France and

Switzerland) even if their practical effect could be minimised through a far-reaching customs

agreement. The UK government has to date ruled out an EEA-type trade arrangement on the

grounds that it would require the UK to transpose EU legislation in which it had no say in

deciding into UK law. This would run counter to the objective of Brexit of ‘taking back control’.

2.5. The WTO dimension of UK withdrawal

Paragraph 13 of the European Council’s negotiating guidelines deals broadly with honouring

international commitments.

“Following the withdrawal, the United Kingdom will no longer be covered by agreements

concluded by the Union or by Member States acting on its behalf or by the Union and its

Member States acting jointly. The Union will continue to have its rights and obligations in

relation to international agreements. In this respect, the European Council expects the

United Kingdom to honour its share of all international commitments contracted in the

context of its EU membership. In such instances, a constructive dialogue with the United

Kingdom on a possible common approach towards third country partners, international

organisations and conventions concerned should be engaged.”

From an agri-food perspective, the most significant sharing of international commitments will

be the division of the EU’s World Trade Organisation (WTO) commitments. The EU’s

commitments are listed in documents called ‘schedules of concessions’, which reflect the

specific tariff concessions and other commitments that it has given in the context of WTO

negotiations on trade liberalisation. For trade in goods in general, these usually consist of

maximum tariff levels which are often referred to as ‘bound tariffs’ or ‘tariff bindings’. In the

case of agricultural products, these concessions and commitments also relate to tariff rate

quotas, limits on export subsidies, and some kinds of domestic support. The content of the EU

schedules has changed over time to take account of successive enlargements as well as

different modifications, such as GATT Article XXVIII negotiations or rectification procedures.


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The UK is a member of the WTO in its own right, as are all other EU Member States

as well as the EU itself. At the moment, the UK’s commitments on maximum tariffs, tariff

rate quotas, domestic agricultural subsidies and agricultural export subsidies are bundled with

the EU’s schedule of concessions. Following Brexit, the UK will need to agree its own schedule

of concessions with other WTO members. 41 F

113 This should not be contentious in the case of its

commitments on bound tariffs where the general assumption is that the UK will inherit the

commitments in the EU schedule (although there will still be issues around the exchange rate

to use in converting EU tariffs in euro to UK tariffs in sterling). However, where the EU’s

commitments consist of quantitative bindings (for example, to import specific amounts of third

country lamb under preferential tariffs, or to limit non-exempt domestic support 42F

114 to a specific

ceiling), the question arises how this shared commitment will be allocated between the UK

and the EU27 after Brexit.

Two sets of quantitative bindings are scheduled under the WTO Agreement on

Agriculture. These are the EU’s commitments on limits on agricultural export subsidies and

on non-exempt domestic agricultural support.

Under the WTO Ministerial Decision on Export Competition adopted at the Nairobi WTO

Ministerial Council in December 2015, developed countries including the EU agreed to

immediately eliminate their remaining scheduled export subsidy entitlements as of the date

of adoption of that Decision. A delay was agreed for processed products, dairy products and

pigmeat until the end of 2020 for developed countries that had provided export subsidies for

these products in a recent period, provided that the quantities subsidised did not exceed the

quantities exported with subsidy in the years 2003-2005 and that no export subsidies would

be applied either to new products or new markets. The UK might be interested to acquire a

share of the EU entitlements to be able to use export subsidies for these products but in any

case they would lapse for both the UK and the EU27 by the end of 2020. 43F

115 In any case, the

EU has already made a voluntary commitment that it will not make further use of agricultural

export subsidies, so agreement on an allocation of the EU remaining entitlements should not

be difficult. The UK would not be able to make use of any entitlement to export subsidies on

the exempted products to subsidise exports of these products to the EU because no subsidies

were paid on exports to this market during the base years 2003-05. As any agreement with

the UK to share entitlements would reduce the EU27 entitlements by a corresponding amount,

an allocation formula based on relative shares of usage in a base period would not likely be

opposed by WTO members.

Somewhat similar considerations apply in the case of the EU commitments on non-

exempt domestic support. The amount of non-exempt support notified by the EU in its

latest notification to the WTO for the year 2013-2014 amounted to €5.97 billion compared to

its non-exempt domestic support ceiling (BTAMS) of €72.38 billion. 44F

116 Because the EU is only

using a fraction of its entitlement to non-exempt domestic support, agreement with the UK on

sharing the EU entitlement based on relative use in a base period should not be difficult

113 These issues are also discussed in House of Commons International Trade Committee, 2017, Chapter 2. 114 Not all domestic support is disciplined under the WTO Agreement on Agriculture. Support which is covered by

Annex 2 (Green Box), Article 6.5 (Blue Box) and de minimis support is exempted from the limit on a developed

country’s domestic support (called the Bound Total Aggregate Measurement of Support, BTAMS). All other types

of support are deemed trade-distorting and must be limited to the country’s BTAMS ceiling in its schedule of

concessions. Domestic support for WTO notifications is calculated according to procedures set out in Annexes 3

and 4 of the WTO Agreement on Agriculture. 115 The EU Mission to the WTO announced on 6 October 2017 that the EU had just submitted a revised goods

schedule to the WTO which includes both the outcome of recent negotiations linked to EU enlargement as well

as implementation of the Nairobi Decision. The revised schedule, which is awaiting certification, incorporates the

full Nairobi Decision including the exemptions until 2020 into the EU schedule. 116 WTO Notification by the European Union G/AG/N/EU/34, 8 February 2017.

http://trade.ec.europa.eu/doclib/press/index.cfm?id=1738


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(although there will be knotty technical problems to resolve in deciding on these shares). 45F

117

Any proposed allocation is also not likely to meet with opposition from other WTO Members

because any scheduled commitment by the UK would lead to a corresponding reduction in the

EU’s entitlement to provide trade-distorting support in the future (although those countries

that were unable to establish a BTAMS ceiling at the time of their accession might object to

the UK being able to do so now). Unlike in the case of export subsidies, where all entitlements

will anyway lapse less than two years after Brexit, the EU27 should be conscious that the

ceiling agreed for the UK will determine its margin for manoeuvre with respect to its future

use of trade-distorting support (e.g. its future use of coupled payments). The higher the ceiling

allocated to the UK, the greater the potential damage to EU27 producers if the UK were to

make full use of its entitlement at some point in the future.

The most controversial area in the division of the EU’s quantitative WTO

commitments concerns its scheduled tariff rate quotas (TRQs) (Downes 2017). These

scheduled TRQs arose at the end of the Uruguay Round as a way of preserving and ensuring

some minimum access for third countries in the face of tariffication.46F

118 Tariffication was the

obligation on WTO Members to replace all forms of import barriers (including quotas, import

licenses, voluntary export restraints, variable import levies and many others) by tariffs which

could then be bound and reduced over time. The fear was that the resulting tariffs might be

set so high that very little trade liberalisation might occur. As a result, two types of TRQs were

created under the WTO Agreement on Agriculture: minimum access and current access

TRQs.47F

119 Where there were no significant imports, minimum access TRQs equal to 5% of

domestic consumption in the base period 1986-88 had to be established. Where an importer

had current imports greater than these minimum amounts, current access TRQs had to be

introduced in order to maintain these export opportunities and allow them to increase. Further

TRQs have been created subsequently by the EU, for example, to compensate third countries

for the loss of market access arising from successive enlargements of the EU, or as part of the

resolution of a WTO dispute brought by a third country against the EU.

There were 85 TRQs in the EU’s initial schedule resulting from the Uruguay Round and this

number increased to 93 in 2006, 112 in 2009 and to 119 in 2013 covering meat, cereals, dairy

products, fruits and vegetables and more (Matthews, Salvatici, and Scoppola 2016). 48F

120 The

quotas vary considerably in both size and form. Some provide a zero duty in-quota tariff rate,

others have tariffs below the MFN rate. The administration of these TRQs is further complicated

because some are pre-allocated to specific exporters (country-specific TRQs) while others are

open to any exporter (global TRQs), and often further restricted by elaborate conditions.

117 Brink, L., “UK Brexit and WTO farm support limits”, capreform.eu, 13 July 2016. 118 Scheduled TRQs at the WTO should be distinguished from TRQs introduced as part of the EU’s FTAs with third

countries. TRQs are often used to provide some concessions to the FTA partner in the case of sensitive products. 119 These provisions are found in the Modalities for the establishment of specific binding commitments under the

reform programme circulated by the Chairman of the Market Access Group, WTO MTN.GNG/MA/W/24, 20

December 1993. 120 The full list is contained in the EU’s Schedule CLXXIII of which the latest version available on the WTO website

is dated 1 December 2016. See also the latest EU notification of imports under TRQs WTO G/AG/N/EU/37 dated

17 March 2017 which lists each scheduled TRQ, the quota quantity, actual imports and the actual fill rate. The

actual use of many of the EU’s TRQs as shown by the fill rate varies widely.

http://capreform.eu/uk-brexit-and-wto-farm-support-limits/


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The UK and EU27 have jointly written a letter to other WTO Members saying that

they will propose a methodology for splitting these TRQs based on relative

consumption shares of the TRQ imports over a recent period.49F

121 However, a bilateral

agreement on sharing out TRQ quantities has a different impact on other WTO Members

compared to sharing out export subsidy or domestic support entitlements. TRQs provide

market access opportunities to other WTO Members. A letter signed by a number of

agricultural exporters in response claims that a division of the existing EU TRQs between the

UK and the EU27 would diminish their export opportunities in both quantity and quality

terms.50F

122 While currently the full volume of a given TRQ can be imported into any Member

State, under the proposed approach those volumes would be reduced. Further, any product

sent into the UK or EU27 currently enjoys effectively ‘frictionless’ onward trade into the other

party, thanks to EU Customs Union and single market rules. If there are additional trade costs

following Brexit, these countries claim this would further diminish the ‘quality’ of access

provided. They also raise the technical problem that using import shares to mirror

consumption can give biased results given that product may be imported into a particular

country for technical reasons but then sent on to other EU Member States for consumption.

These other WTO Members therefore imply that the overall size of the combined TRQs after

Brexit should be increased to reflect this diminution of their export opportunities. 51F

123 In the

extreme, the suggestion has been made that the EU27 should maintain the full value of current

TRQs and that the UK should, in turn, also schedule TRQs of equal value. Such an outcome

would be opposed by UK and EU27 farmers because it would represent additional competition

from third country exporters on these markets.

This study is not the place to discuss the rights and wrongs of these positions on future

scheduled TRQ commitments, 52F

124 but there are implications for possible transition

arrangements particularly in the event of a ‘hard’ Brexit. In particular, splitting the EU TRQs

would mean that the UK TRQs would make no specific provision for existing UK-EU27

trade, and vice versa. This might not have any practical implications if the UK and the EU27

create a bilateral free trade agreement covering agricultural products on Brexit Day. However,

this omission has huge implications if tariff barriers are erected. These implications are further

explored in Chapter 4. There may also be a need to split TRQs specifically allocated to the EU

by other WTO members as part of their commitments, although the number and importance

of these TRQs has not been clarified.

121 UK Department of International Trade, “UK and EU set out proposals to WTO members for trade post-Brexit”,

11 October 2017. 122 The letter is available on the Financial Times website. 123 To meet this criticism, the UK and the EU27 could enter into their schedules that their TRQs represent a joint

obligation to meet their commitments to other WTO Members. 124 See Ungphakorn, P., “EU joins UK in post-Brexit WTO talks as data emerges as first major hurdle”, Agra Europe,

23 Oct 2017 for the most recent account of the TRQ discussions in Geneva at the time of writing this study.

https://www.gov.uk/government/news/uk-and-eu-set-out-proposals-to-wto-members-for-trade-post-brexit

http://im.ft-static.com/content/images/ec0a64b2-a95f-11e7-ab55-27219df83c97.pdf

https://iegpolicy.agribusinessintelligence.informa.com/PL213039/EU-joins-UK-in-postBrexit-WTO-talks-as-data-emerges-as-first-major-hurdle


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3. Avoiding a ‘cliff edge’ for agri-food trade

KEY FINDINGS

Even if the UK and the EU27 conclude an agreement on the withdrawal conditions

and on the nature of their future relationship by 29 March 2019, traders face a

‘cliff-edge’ situation because of the lack of preparedness of the customs

administrations and other relevant authorities on both sides to manage border

controls; the lack of knowledge on the part of the large number of new businesses

that will face the need to seek customs clearance for their exports and imports; and

the almost certain congestion at major ports of entry and exit because of the extra

time required for these controls.

Both parties have indicated a willingness to consider a transition period. Both parties

have also indicated their ‘red lines’ regarding matters on which they would insist

during a transition period. There is little clarity, however, about how extensive

such a transition arrangement might be and what laws and regulations it

would have to cover to ensure that trade, including trade in agri-food products,

would continue on the same basis as it does today.

One option is that the UK would remain a Member State of the EU for a

further time-limited period, either by including a withdrawal date later than 29

March 2019 in the withdrawal agreement or by unanimously agreeing to extend the

Art.50 TEU deadline for the negotiations.

Another option is that the UK would agree to bind itself to following the

relevant Union acquis as a non-Member State for a time-limited period after

29 March 2019 while also joining a temporary customs union for this period.

Negotiating what would effectively be a complete if temporary trade agreement at

the same time as the parties are negotiating a withdrawal agreement and the

framework for their future relations may be more than can be achieved in the

remaining time available.

Fall-back positions which would avoid some but not all of the additional trade

costs, such as a temporary customs union on its own or just a free trade agreement

in goods, should be considered if it proves impossible to reach an agreement in which

the UK remains bound by the relevant Union acquis in the time available.

Following the mandate at the October 2017 meeting of the European Council

(Art.50), the General Council (Art. 50) and the Union negotiator should seek

to rapidly progress preparatory work particularly on models of transitional

arrangements. This should help to clarify what might be the minimum requirements

to ensure that trade can continue to take place with the UK as it does today for the

duration of the transition period, and what an appropriate balance of rights and

obligations might be during this period.

Specific issues for consideration will include whether UK membership of the CAP

and the Common Fisheries Policy (CFP) will be deemed necessary as a prerequisite

for continued free trade in agricultural and fishery products during the transition

period, as well as arrangements to ensure the continued protection of Geographical

Indications in the UK

The previous chapter discussed the nature of the additional trade costs that would face EU

agri-food traders in the event that the UK withdrew from the EU in a ‘hard’ Brexit, and possible

long-term trade arrangements between the UK and the EU27 which would help to mitigate

some or all of these trade costs.


164

In this chapter, we assume that the Article 50 TEU negotiations proceed fruitfully and

there is an agreement both on the withdrawal conditions and on the nature of the

future relationship which is ratified by both parties before March 29 2019. However,

if the UK insists that this should be the date of its departure from the EU, it will result

in the ‘cliff edge’ problem that traders would be likely to face considerable disruption

immediately after Brexit Day. One reason is that both parties are highly likely not to have

agreed and ratified a fully-fledged trade agreement by this date, even if they have reached

agreement on an outline or a future framework. A second reason is that market access under

the future trade arrangement will inevitably be more restricted than is the case at present.

This implies increased administrative formalities when goods cross the UK-EU27 border, as

well as the possibility of increased physical checks and associated time delays, and time will

be needed to make these arrangements possible. For these reasons, both the EU27 and the

UK have recognised the need for a transitional or interim arrangement although there is

disagreement about what this might entail and how long it would last. This chapter examines

how agri-food trade could be affected by different transition arrangements.

There is also the possibility that, after 29 March 2019, trade between the UK and the

EU27 could reflect a ‘hard’ Brexit situation because the withdrawal negotiations

break down and the UK exits without a withdrawal agreement. Trade would then take

place on MFN terms and, given the likely bad blood between the parties in this outcome, the

prospect of a trade agreement would be postponed to some future date. In this situation, the

question of negotiating a transitional arrangement does not arise. A transitional arrangement

to avoid a ‘hard’ Brexit is only relevant when the parties either have ratified or are continuing

to negotiate their future relationship.

3.1. The need for transition arrangements

A key concern for EU27-UK agri-food trade in the event of a ‘hard’ Brexit, especially

for perishable food products, is the prospect of delays at the key cross-Channel

crossings. The UK, Ireland, France, Belgium and the Netherlands will have to make big

investments in customs systems and lorry parks at their ports to cope with the post-Brexit

surge of customs declarations and consignment checks. There are three main concerns: the

ability of customs systems to cope with the dramatic increase in consignments requiring

clearance, the huge increase in the number of firms with no previous experience that will now

need to access customs clearance procedures, and the prospect of logistical bottlenecks

because of the inability of the key cross-Channel entry points to cope with the extra time that

would be required for customs and health checks.

Lack of customs readiness. The specific challenges facing the UK have been well

documented, particularly in a recent National Audit Office (NAO) report on implementation of

the new UK Customs Declaration Service (CDS) by Her Majesty’s Revenue and Customs

(HMRC) (National Audit Office 2017). This replacement for the software currently handling

customs clearance in the UK was initiated partly in response to the need to upgrade UK

customs systems to meet the requirements of the new EU Union Customs Code. It is scheduled

to come into force in January 2019 so as to be ready to meet the EU deadline for all customs

procedures to be handled electronically after 2020, but the Brexit date at end March 2019

makes delivery of the new system even more time-sensitive.

All experience with the introduction of large and complex software systems suggests

there will be inevitable teething problems. The NAO report found that HMRC has made

progress in designing and developing the new software but that there is still a significant

amount of work to complete, and there is a risk that HMRC will not have the full functionality

and scope of CDS in place by March 2019 when the UK plans to leave the EU.


165

Also, the addition of customs clearance requirements for current intra-EU trade

would make demands on the CDS system above its design capacity. Currently, there

are 141,000 UK traders who make customs declarations for trade outside the EU. HMRC

estimate that a further 180,000 traders will make declarations for the first time under the new

system, assuming that the UK leaves the customs union. Currently, there are around 55 million

declarations per year; this is expected to rise nearly five-fold to 255 million after March 2019

based on current levels of UK/EU27 trade. The current design capacity for the new CDS is to

handle 150 million declarations each year, rather than the estimated 255 million.

While these are the potential problems that the UK would face, similar challenges

face EU27 Member State customs administrations, many of which are also upgrading

systems to meet the new UCC requirements. There is virtually no information available on the

EU side on its preparedness to deal with exports to the UK or imports from the UK in the event

of a ‘hard’ Brexit. 53F

125 However, Ireland is expecting the number of customs transactions to

increase by a factor of ten. 54F

126

It is not only customs administrations that will be challenged to cope with UK-EU27 trade after

Brexit. Many plant and animal products are only able to enter through designated entry points

where physical inspections including laboratory tests can take place. There is very limited

capacity to handle all of the additional inspections that would be required if trade between the

UK and the EU27 also had to be inspected. For example, neither Calais nor Coquelles, the two

main points of entry into France, has a Border Inspection Post for animal products.

Lack of business readiness. It is not only the public authorities that need to prepare for a

’hard’ Brexit but also private businesses. New systems would have to be installed, and staff

would have to be trained. This will be especially important for the many businesses now

exporting within the single market that have no experience with customs clearance

procedures. As Joe Owen of the Institute for Government in the UK explained: 55F

127

“Again, the best way to understand timelines for customs is to look at past changes. The

EU’s Union Customs Code was designed in 2013, introduced across the EU in 2016 and

businesses have until 2020 to become compliant. While that seven-year planning horizon

could be reduced in the case of Brexit, could you really cut it back to just two years? That

is a heroic timeline.”

Logistical difficulties. Access to the UK market requires goods to be moved through UK

ports (including the Channel Tunnel in this designation) and UK access to the EU27 market

means moving goods through EU27 ports. The only exception is lorries crossing the only land

border between the UK and the EU27 between Northern Ireland and Ireland. As can be seen

from Figure 5, there are two main corridors which will be affected by a ‘hard’ Brexit,

the Dover Strait corridor across the Channel and the Dublin corridor across the Irish

Sea. Dover is the key artery for UK trade with continental Europe, with over 2.5 million heavy

goods vehicles (HGVs) passing through the port each year (10,000 per day) in either direction,

and a further 1.6 million freight movements through the Channel Tunnel.

125 Mr Jim Harra, Director General, Customer Strategy and Tax Design, HM Revenue and Customs, “Oral evidence:

Her Majesty's Revenue and Customs Annual Report and Accounts, HC 314”, UK House of Commons Treasury

Select Committee, 14 September 2017 stated: “But when it comes to post-Brexit arrangements, other member

states have been clear that that is a matter for the Commission and the Commission’s negotiating team to deal

with. So we are not having significant discussions with other customs authorities in the EU about what their

arrangements will be post-Brexit, but clearly, just as there is a task for the UK to deliver, there will be a task

for them as well. More insight into their preparedness for that will be very useful to us, but we don’t currently

have it (italics added)”. 126 “Brexit - Recent Developments and Future Negotiations: Discussion”, Evidence by Liam Irwin of the Office of the

Revenue Commissioners to the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, and

Taoiseach, 16 May 2017. 127 “Britain’s ‘heroic timeline’ to introduce new customs regime”, Financial Times, October 10, 2017.

http://data.parliament.uk.elib.tcd.ie/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/hmrc-annual-report-and-accounts/oral/70147.pdf

http://data.parliament.uk.elib.tcd.ie/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/hmrc-annual-report-and-accounts/oral/70147.pdf

http://oireachtasdebates.oireachtas.ie/debates%20authoring/DebatesWebPack.nsf/committeetakes/FPJ2017051600002?opendocument#C00100

https://www.ft.com/content/e9479498-adb0-11e7-aab9-abaa44b1e130


166

Both Dover and the Channel Tunnel crossings are designed for RoRo traffic (where goods

remain on the back of a lorry and are driven on to a ferry or the train for the Channel Tunnel

or, in the case of Dover, also for trailer transport (where the trailers are dropped off and picked

up on the other side by another haulier). Lorries account for 45% of all non-bulk goods traffic

with the EU and trailers for a further 24% (Owen, Shepheard, and Stojanovic 2017). A lorry

driver arriving at the port of entry will stop briefly only to show passport and boarding

information, and on arrival will be on the motorway within minutes. This compares to lorry

loads of goods entering Dover from outside the EU (around 3% of the total) which are subject

to checks that take 45 minutes on average (Meaney 2017). Currently, the Channel ports do

not have the parking facilities to cope with delays of this magnitude, leading to fears of

massive congestion for traffic on the cross-Channel and Irish Sea routes.

Figure 20: Annual lorry traffic and EU share of trade for selected major UK ports

in 2015

Source: Owen et al, 2017, reproduced with permission.


167

3.2. Views of the parties on transition

3.2.1. Article 50 on transition

Article 50(3) TFEU provides for the following arrangements for withdrawal:

“3. The Treaties shall cease to apply to the State in question from the date of entry into

force of the withdrawal agreement or, failing that, two years after the notification referred

to in paragraph 2, unless the European Council, in agreement with the Member State

concerned, unanimously decides to extend this period.”

This Article provides for two possible withdrawal dates but makes no explicit

reference to a transition period. If there is a date agreed in the withdrawal agreement,

then the UK would remain a full member to that alternative date, and would then cease to be

a member altogether (as a curiosum, the exit date could also be before 29 March 2019 if this

were agreed as part of the withdrawal agreement). The withdrawal agreement needs only a

qualified majority of the EU27 Member States, as well as the approval of the European

Parliament. The two-year deadline which expires on 29 March 2019 is a default in the event

there is no such agreed date.

The second way envisaged by Article 50 TEU of extending the two-year period is for the period

to be extended without a withdrawal agreement in order to allow negotiations to continue.

This extension would require unanimous support of the EU27 and the UK. Again, the UK would

remain a full member of the EU. The new date could be a specific one, or it could be an open

extension ‘until further notice’. 56F

128

In the UK Prime Minister’s Florence speech in September 2017, Mrs May appeared to close off

these options. In her speech she stated:

“The United Kingdom will cease to be a member of the European Union on 29th March

2019. We will no longer sit at the European Council table or in the Council of Ministers, and

we will no longer have Members of the European Parliament”.

At face value, this implies that the UK is not interested in pursuing a withdrawal

agreement that sets a withdrawal date later than 29 March 2019. Nor is it interested

in trying to persuade the EU to unanimously extend the negotiating period. The speech states

that the UK intention is to leave the EU on 29 March 2019. EU traders should therefore prepare

for a change in trading conditions from that date.

3.2.2. The EU position on a transition period

The European Parliament expressed its view on transition arrangements in its Brexit resolution

of 5 April 2017:

“Believes that transitional arrangements ensuring legal certainty and continuity can only be

agreed between the European Union and the United Kingdom if they contain the right

balance of rights and obligations for both parties and preserve the integrity of the European

Union’s legal order, with the Court of Justice of the European Union responsible for settling

any legal challenges; believes, moreover, that any such arrangements must also be strictly

limited both in time – not exceeding three years – and in scope, as they can never be a

substitute for European Union membership.”

128 David Allen Green, “The problems of the Brexit transition”, Financial Times, 26 September 2017

https://www.ft.com/content/fc1a5466-08df-3301-ae14-046c9b27f631


168

The European Council (Art. 50) in its guidelines in April 2017 accepted that transition

arrangements could be part of the withdrawal agreement. Having defined what it felt

were core principles in the negotiations, it emphasised that “The core principles set out above

should apply equally to the negotiations on an orderly withdrawal, to any preliminary and

preparatory discussions on the framework for a future relationship, and to any form of

transitional arrangements”. The core principles, in turn, are defined as follows:

The desire to have the United Kingdom as a close partner in the future.

Any agreement with the United Kingdom will have to be based on a balance of rights

and obligations, and ensure a level playing field.

Preserving the integrity of the Single Market excludes participation based on a sector-

by-sector approach.

A non-member of the Union, that does not live up to the same obligations as a member,

cannot have the same rights and enjoy the same benefits as a member.

The Union will preserve its autonomy as regards its decision-making as well as the role

of the Court of Justice of the European Union.

In accordance with the principle that nothing is agreed until everything is agreed,

individual items cannot be settled separately.

The Union will approach the negotiations with unified positions, and will engage with

the United Kingdom exclusively through the channels set out in these guidelines and in

the negotiating directives.

The guidelines went on to specify the following conditions around any transition arrangements.

“To the extent necessary and legally possible, the negotiations may also seek to determine

transition arrangements which are in the interest of the Union and, as appropriate, to

provide for bridges towards the foreseeable framework for the future relationship in the

light of the progress made. Any such transition arrangements must be clearly defined,

limited in time, and subject to effective enforcement mechanisms. Should a time-limited

prolongation of Union acquis be considered, this would require existing Union regulatory,

budgetary, supervisory, judiciary and enforcement instruments and structures to apply.”

Based on the guidelines, any transition arrangements would need to fulfil three conditions:

they must (a) be clearly defined, (b) limited in time, and (c) subject to effective enforcement

mechanisms. Furthermore, a transition which involves “a time-limited prolongation of Union

acquis” would also require “existing Union regulatory, budgetary, supervisory, judiciary and

enforcement instruments and structures to apply”. These conditions were repeated verbatim

in the Council’s negotiating directives to the EU negotiator Michel Barnier.

The European Parliament in its resolution on the state of play of negotiations with

the United Kingdom in October 2017 was even more explicit on the conditions that

should apply during a transition period:

“Notes, in line with its resolution of 5 April 2017, that the Prime Minister of the United

Kingdom proposed in her speech of 22 September 2017 a time-limited transitional period;

such a transition can only happen on the basis of the existing European Union regulatory,

budgetary, supervisory, judiciary, enforcement instruments and structures; underlines that

such a transitional period, when the United Kingdom is no longer a Member State, can only

be the continuation of the whole of the acquis communautaire which entails the full

application of the four freedoms (free movement of citizens, capital, services and goods),

and that this must take place without any limitation on the free movement of persons by

imposing any new conditions; stresses that such a transitional period can only be envisaged


169

under the full jurisdiction of the Court of Justice of the European Union (‘ECJ’); insists that

such a transition period can only be agreed provided that a fully-fledged withdrawal

agreement covering all the issues pertaining to the United Kingdom’s withdrawal is

concluded.”

3.2.3. The UK position on a transition period

The British government has been clear from the outset that some form of transition

period would be desirable if not essential.57 F

129 The UK Prime Minister, Mrs May, in her

Lancaster House speech in January 2017, under the rubric Smooth orderly Brexit, set out the

objectives for the transition period. These were repeated verbatim in the subsequent UK White

Paper on exit from and new partnership with the European Union published in February 2017.

“But there is one further objective we are setting. For as I have said before – it is in no

one’s interests for there to be a cliff-edge for business or a threat to stability, as we change

from our existing relationship to a new partnership with the EU.

By this, I do not mean that we will seek some form of unlimited transitional status, in which

we find ourselves stuck forever in some kind of permanent political purgatory. That would

not be good for Britain, but nor do I believe it would be good for the EU.

Instead, I want us to have reached an agreement about our future partnership by the time

the 2-year Article 50 process has concluded. From that point onwards, we believe a phased

process of implementation, in which both Britain and the EU institutions and member states

prepare for the new arrangements that will exist between us will be in our mutual self-

interest. This will give businesses enough time to plan and prepare for those new

arrangements.

This might be about our immigration controls, customs systems or the way in which we co-

operate on criminal justice matters. Or it might be about the future legal and regulatory

framework for financial services. For each issue, the time we need to phase-in the new

arrangements may differ. Some might be introduced very quickly, some might take longer.

And the interim arrangements we rely upon are likely to be a matter of negotiation.

But the purpose is clear: we will seek to avoid a disruptive cliff-edge, and we will do

everything we can to phase in the new arrangements we require as Britain and the EU

move towards our new partnership”.

In her Article 50 letter to European Council President Donald Tusk on 29 March 2017, the UK

Prime Minister wrote:

“We should work together to minimise disruption and give as much certainty as possible.

Investors, businesses and citizens in both the UK and across the remaining 27 member

states - and those from third countries around the world - want to be able to plan. In order

to avoid any cliff-edge as we move from our current relationship to our future partnership,

people and businesses in both the UK and the EU would benefit from implementation

periods to adjust in a smooth and orderly way to new arrangements. It would help both

sides to minimise unnecessary disruption if we agree this principle early in the process.”

129 The UK side has made reference to an ‘implementation period’. This assumes that agreement has been reached

on the details of the future trade agreement and it is just a question of phasing in these arrangements. It reflects

the early belief expressed by UK Government Ministers that it would be a simple matter to agree both the

withdrawal arrangements and a future trade agreement and that all of this could be wrapped up within the two-

year period specified in Article 50. Events suggest that these expectations have proved over-optimistic, to put it

mildly.


170

The UK view on an interim arrangement was further developed in the context of

future customs arrangements in its position paper on future customs arrangements

(HM Government 2017b).

“However, under either approach [to future customs arrangements], both the UK and EU

Member States would benefit from time to fully implement the new customs arrangements,

in order to avoid a cliff-edge for businesses and individuals on both sides. The Government

believes a model of close association with the EU Customs Union for a time-limited interim

period could achieve this. It would help both sides to minimise unnecessary disruption and

provide certainty for businesses and individuals if this principle were agreed early in the

process. The Government would need to explore the terms of such an interim arrangement

with the EU across a number of dimensions. The UK would intend to pursue new trade

negotiations with others once we leave the EU, though it would not bring into effect any

new arrangements with third countries which were not consistent with the terms of the

interim agreement”.

While the previous references to transition arrangements had simply made the case that such

arrangements would be in the mutual interest of both parties, this was the first reference to

the concrete form that a transitional arrangement might take. The UK Prime Minister was still

hedging her bets (talking about an unspecified “model of close association with the EU

Customs Union” rather than the more straightforward idea of a temporary customs union

between the two parties). She also laid down a marker that the UK would intend to enter into

negotiations with third countries on possible free trade agreements, although she recognised

that these could not be implemented if they were “not consistent with the terms of the interim

agreement”. That the customs paper put emphasis on maintaining a close association with the

EU Customs Union but made no reference to regulatory coherence could simply reflect the fact

that the paper was focused on customs arrangements.

The UK Prime Minister went much further in outlining her views on a transition

period in her Florence speech in September 2017:

“But the fact is that, at that point [i.e. 29 March 2019], neither the UK - nor the EU and its

Members States - will be in a position to implement smoothly many of the detailed

arrangements that will underpin this new relationship we seek.

Neither is the European Union legally able to conclude an agreement with the UK as an

external partner while it is itself still part of the European Union.

And such an agreement on the future partnership will require the appropriate legal

ratification, which would take time.

It is also the case that people and businesses – both in the UK and in the EU – would benefit

from a period to adjust to the new arrangements in a smooth and orderly way.

As I said in my speech at Lancaster House a period of implementation would be in our

mutual interest. That is why I am proposing that there should be such a period after the

UK leaves the EU.

Clearly people, businesses and public services should only have to plan for one set of

changes in the relationship between the UK and the EU.


171

So during the implementation period access to one another’s markets should continue on

current terms and Britain also should continue to take part in existing security measures.

And I know businesses, in particular, would welcome the certainty this would provide.

The framework for this strictly time-limited period, which can be agreed under Article 50,

would be the existing structure of EU rules and regulations.

How long the period is should be determined simply by how long it will take to prepare and

implement the new processes and new systems that will underpin that future partnership.

For example, it will take time to put in place the new immigration system required to re-

take control of the UK’s borders.

So during the implementation period, people will continue to be able to come and live and

work in the UK; but there will be a registration system – an essential preparation for the

new regime.

As of today, these considerations point to an implementation period of around two years.

But because I don’t believe that either the EU or the British people will want the UK to stay

longer in the existing structures than is necessary, we could also agree to bring forward

aspects of that future framework such as new dispute resolution mechanisms more quickly

if this can be done smoothly.

It is clear that what would be most helpful to people and businesses on both sides, who

want this process to be smooth and orderly, is for us to agree the detailed arrangements

for this implementation period as early as possible. Although we recognise that the EU

institutions will need to adopt a formal position.

And at the heart of these arrangements, there should be a clear double lock: a guarantee

that there will be a period of implementation giving businesses and people alike the

certainty that they will be able to prepare for the change; and a guarantee that this

implementation period will be time-limited, giving everyone the certainty that this will not

go on for ever.

These arrangements will create valuable certainty.”

This speech goes much further in spelling out how the transition/implementation period might

work by proposing a time-limited implementation period “based on current terms”. For the

first time the UK has indicated that the transition period should cover rules as well as the

customs union. Nonetheless, there is evidence of different views within the UK

Conservative Party on some of the details of this transition. In the run up to the

Conservative Party conference in October 2017 the UK Foreign Secretary Boris Johnson gave

an interview to The Sun newspaper in which he set out four ‘red lines’ which expanded on the

Florence speech. 58F

130 These were:

The transition period post-Brexit must be a maximum of 2 years and not a second more.

UK must refuse to accept new EU or European Court of Justice (ECJ) rulings during

transition.

No payments for single market access when transition ends.

UK must not agree to shadow EU rules to gain access to market.

130 Newton Dunn,, T., “Brexy beast: Boris Johnson reveals his four Brexit ‘red lines’ for Theresa May”, The Sun, 29

September 2017.

https://www.thesun.co.uk/news/4580334/boris-johnson-pm-brexit-red-lines/


172

On the one hand, the Foreign Secretary appeared to want a stricter time limit for the transition

period where the Prime Minister had suggested a period of ‘around two years’ but in any case

based on the length of time needed to put new processes and systems in place. Where the

Prime Minister had talked about “new dispute settlement mechanisms”, the Foreign Secretary

was explicit that these should not require acceptance by the UK of CJEU rulings. Where the

Prime Minister had talked about accepting EU rules and regulations during the transition, the

Foreign Secretary was explicit that the UK should not be required to implement new EU rules

and regulations during transition. Many will agree with his position given that the UK will not

have any representation on EU decision-making bodies during this period. On the other hand,

the Foreign Secretary was clear that the UK should not make payments for single market

access when transition ends, leaving open whether he would support budgetary contributions

for single market access during the transition.

Further details on the UK view of the transition period were provided in the Prime

Minister’s statement to and in answers to questions in the House of Commons on the

Brexit negotiations on 9 October 2017.59F

131 In response to a question to explain how the

arrangements she was seeking for the transition differ from being a member of the single

market and the Customs Union for the period of the transition the Prime Minister replied:

“I have to say to the right hon. Gentleman that, as we leave the European Union in March

2019, we will leave full membership of the customs union and full membership of the single

market. What we then want is a period of time when practical changes can be made, as we

move towards the end state—the trade agreement—that we will have agreed with the

European Union. We have to negotiate for the implementation period what the

arrangements would be. We have suggested that that should be a new agreement—an

agreement that we should be able to operate on the same basis and on the same rules and

regulations.”

The Prime Minister did not make clear in what way a new agreement might differ from

membership of the Customs Union and single market while permitting trade to continue on

the same basis as when the UK was a member of the Customs Union and single market.

In response to a further question to clarify the consistency between being out of the Customs

Union and the single market while still trading on the same basis as firms do at the moment,

the Prime Minister replied:

“As of 29 March 2019, we leave the European Union. That means we leave full membership

of the customs union and full membership of the single market. … during that

[implementation] period what we are proposing is that it is in the interests of individuals

and businesses on all sides to be able to continue to operate on the same basis as they

do today”.

When asked specifically whether she agreed with the views of the European Parliament in its

Brexit resolution of 3 October 2017 that a transition period can happen only on the basis of

the existing EU regulatory, budgetary, supervisory, judiciary and enforcement instruments,

her response was:

“That is the view of the European Parliament in its resolution. In my statement and my

Florence speech, I put out that we expect that the implementation period will be based

on the current rules and regulations, but of course this is part of the negotiation”.

131 May, T., “UK plans for leaving the EU”, Statement to the UK House of Commons, 9 October 2017.

https://hansard.parliament.uk/commons/2017-10-09/debates/B119A163-5708-4B76-847A-0F8AFE4CD5F9/UKPlansForLeavingTheEU


173

In responding to an invitation to confirm that the rulings of the CJEU would no longer apply in

the UK after 29 March 2019, and that any new laws introduced by the EU27 after that date

would have no effect until agreed specifically the UK Parliament, the Prime Minister clarified

that “We will have to negotiate what will operate during the implementation period. Yes, that

may mean that we start off with the ECJ still governing the rules we are part of for that period,

but we are also clear that we can bring forward discussions and agreements on issues such as

a dispute resolution mechanism. If we can bring that forward at an earlier stage, we would

wish to do so”. This was the first time the UK indicated that it would be willing to

accept a role for the CJEU during the transition.

On the question regarding the status of legislation that might come into effect during the

transition period, the Prime Minister distinguished between legislation which has already been

introduced and new legislation that might be proposed during the transition period. With

respect to legislative proposals which were brought forward before Brexit Day, she pointed

out that the UK would be in a position to make clear in the withdrawal agreement whether

that was a regulation it would be willing to sign up to or not. With respect to legislative

proposals introduced after Brexit Day but during the transition period, her view was that the

EU legislative process moves so slowly that, in practice, this would not be an issue.

The UK Prime Minister’s Florence speech and statement and replies to the House of

Commons gives much more substance to how the UK envisages the transition period

and the conditions it is prepared to accept during that period. The following four points

can be highlighted as underlying the UK position:

During the implementation period access to one another’s markets should continue “on

current terms”. The framework during this period would be “the existing structure of EU

rules and regulations”. On the other hand, the Prime Minister is saying that “the UK will

leave full membership of the customs union and full membership of the single market”. It

is hard to see these positions as consistent. The customs union case might be

reconciled as follows. By joining a temporary customs union with the EU27 for the

transition period, the UK would continue to apply the Common Commercial Policy including

the CET. But it would use its position as a non-EU Member State to open free trade

negotiations with third countries, something it could not do while an EU Member State,

while accepting that any agreements could not be implemented until the end of the

transition period. The desire to retain the benefits of the single market while leaving the

single market is, at face value, more difficult to reconcile. One interpretation might be that

the UK would like to ‘take back control’ immediately of those aspects of the Union acquis

which are not essential to the operation of the single market, while being willing to observe

the Union acquis which underpins the single market. However, the Florence speech puts

down a marker that, while EU27 citizens will continue to be able to come and live and work

in the UK, the UK would want to introduce a registration system.

While the length of the transition period should be strictly time-limited, the

Florence speech leaves open to further negotiations what this length might be.

The length “should be determined by how long it will take to prepare and implement the

new processes and new systems that will underpin the future partnership” and the

suggestion is made that these considerations “point to an implementation period of around

two years”. The speech also suggests that different aspects of the new arrangements might

be phased in at different times, and that some aspects could be introduced earlier than

others. New dispute mechanism procedures are specifically highlighted in this context.

The UK has accepted that it would be under the jurisdiction of the CJEU during a

transition arrangement, something which should facilitate an agreement which would

bind the UK to implementing the relevant Union acquis during this period.


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While the Florence speech states that the UK would be prepared to accept the EU’s rules

and regulations during the transition period, it makes no reference to a willingness to

make budgetary contributions towards economic and social cohesion in the single

market during this period (which would be separate to any financial settlement agreed as

part of the withdrawal negotiations).

3.3. Extending the date for Brexit beyond 29 March 2019

Although the UK government appears to have ruled this out, it is worth considering further

the implications of this option given that it is by far the easiest and most obvious way of

maintaining the existing trade relationship during the transition period. 60F

132 It does this by

avoiding the need for a transition period, because the UK would remain a full member of

the EU, with the attendant rights and obligations of membership, until a future agreement

was ready to be put in place. The UK would continue to accept the four freedoms, decisions of

the CJEU would continue to have direct effect in the UK (while also protecting the rights of UK

nationals and businesses in other parts of the EU), the UK would continue to have a say on

proposed new regulations during this period, and the UK would continue to make budgetary

contributions to the EU. In return, trade would continue exactly as it does today. This solution

has the great merit that it would avoid Governments and businesses, both in the EU and the

UK, having to change processes twice: once to reflect the terms of the transition and again to

reflect the terms of the new relationship. It would also avoid the need for any border checks

on the Northern Ireland border during the transition period.

The first major obstacle to this solution is on the British side. The government would

be open to the charge that it had not delivered Brexit. This criticism could be countered if a

firm date for Brexit were agreed even if later than 29 March 2019. This could be achieved

either by concluding a withdrawal agreement before 29 March 2019 which specified an

alternative, later, date (which would have to be agreed by a qualified majority of the EU27

Member States and gain the consent of the European Parliament), or by unanimous agreement

of the EU27 to extend the period for the withdrawal negotiations to a specific future date. It

could be further guaranteed on the UK side by specifying a withdrawal date in the European

Union (Withdrawal) Bill or through another Act of Parliament.

The next UK general election is scheduled to be held on 5 May 2022 under the Fixed-term

Parliaments Act 2011 (an election may be held at an earlier date in the event of an early

election motion being passed by a super-majority of two-thirds in the House of Commons, a

vote of no confidence in the government or other exceptional circumstances). Thus, the date

for UK withdrawal from the EU could be extended by three years beyond 29 March 2019 while

still ensuring that the next UK general election would be held when the UK was no longer an

EU Member State. The UK Conservative Party would still be able to fight that election on the

basis that it had delivered Brexit. From a British perspective, opposition to this solution is

more likely to emerge from the internal politics of the UK Conservative Party where one wing

seems determined on exit regardless of the economic consequences.

Accepting that the UK would remain an EU Member State for, say, a further three

years after 29 March 2019 would likely cause equal complications on the EU side. In

May 2019 there will be elections to the European Parliament for a five-year period. If the UK

were still a Member State it would be entitled to elect MEPs in those elections. The EU is about

to embark on the negotiations for its next Multi-Annual Financial Framework (MFF). Indeed,

the Commission proposal for the next MFF which was due to be presented before the end of

2017 has already been delayed to the first half of 2018 because of the uncertainty around the

132 See Winters, A., Holmes, P. and Szyszczak, E. “Transition made easy”, UK Trade Policy Observatory, 26

September 2017.

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extent of future UK contributions to the EU budget. Agreeing the MFF is always contentious

because there are net contributors to and net beneficiaries from the EU budget. Thus,

agreement on both its size and composition involves decisions on the distribution of resources

between Member States. The UK is the second largest net contributor to the UK budget so

whether it is a Member State or not when the MFF negotiations take place will have a

determining impact on the outcome. Nonetheless, a time-limited extension of UK membership

would be manageable. The objections from the EU side are more likely to be political rather

than practical.

3.4. Extending the EU acquis to a non-member

The second option is that when the UK leaves the EU there is agreement to maintain current

rules and regulations during a transition period. Some object to the suggestion that one can

discuss a transition or implementation period without knowing the final destination. 61F

133 This

criticism may be valid with respect to the concept of an implementation period, which is

premised on the idea that the terms of the future relationship will be fully negotiated by 29

March 2019. However, there is no ambiguity around the concept of a transition period

which simply aims to maintain trade on the same basis as at present; the only issue

is how to achieve this.

The UK would no longer be an EU Member State but it would agree to be bound to apply the

Union’s rules to ensure the continuation of trade on current terms during this period. The EU

has opened this option by saying that the Union acquis must apply to the UK during the

transition period. The UK has accepted that EU rules and regulations should apply during this

period, although with considerable ambiguity around how that would be achieved if the UK

were at the same time to leave the single market and the Customs Union.

From the perspective of agri-food trade, an extension of the EU acquis, which would

also have to include the UK entering into a temporary customs union with the EU,

would ensure the continuation of the trade status quo for the duration of the

transition period. This solution would also avoid Governments and businesses, both in the

EU and the UK, having to change processes twice: once to reflect the terms of the transition

and again to reflect the terms of the new relationship. It would also avoid the need for any

border checks on the Northern Ireland border during the transition period.

There would need to be clarity around how to interpret the meaning of phrases such as “a

time-limited prolongation of Union acquis” (European Council), “the continuation of the whole

of the acquis communautaire which entails the full application of the four freedoms” (European

Parliament) and “continued access to one another’s markets on current terms” (UK Prime

Minister). For example, does the position of the European Council and European Parliament

imply that the UK must continue to operate its agricultural policy under the rules of the

Common Agricultural Policy during the transition period? Would the UK have to continue to

apply the rules of the Common Fisheries Policy? There are a wide number of Union policies,

including energy, climate, science and research, and environment, which are not directly

133 In response to a question following her statement to the House of Commons reporting on the outcome of the

European Council meeting 20-21 October 2017, the Prime Minister stated: “… the point of the implementation

period is to put in place the practical changes necessary to move to the future partnership, and in order to have

that you need to know what that future partnership is going to be” (Hansard, “European Council”, 23 October

2017). At face value, this seems to differ from the concept of a transition period put forward by the Prime

Minister previously which is intended to maintain trade “on current terms”. Because it seems more appropriate

to put more weight on the message in the considered statements that the Prime Minister has made, and because

it is unlikely that the details of the future trade relationship can be agreed by summer of 2018, the transition

period concept used in this chapter is that it is intended to maintain the status quo in trade as far as possible.

https://hansard.parliament.uk/commons/2017-10-23/debates/AAC75F82-E84E-4976-86C8-DCCAFC2A7F97/EuropeanCouncil


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linked to trade. 62F

134 While the UK, under its European Union (Withdrawal) Bill, intends to

replicate these policies into British law on Brexit Day, would the UK be able to make changes

to regulations in these areas during the transition period?

The European Parliament has already resolved that any future trade agreement should bind

the UK to respecting international norms and standards in a range of non-trade policy areas

such as environment, climate change, the fight against tax evasion and avoidance, fair

competition, and trade and social rights. Presumably this requirement would also attach to a

transition agreement. The UK might argue that, as a non-Member State at that point, it should

not be restricted in the policies it adopts which are not directly related to trade. At a minimum,

it would be necessary to ensure that giving the UK policy autonomy in these areas does not

risk that UK producers could be advantaged relative to EU27 producers within the single

market during the transition period.

As a hypothetical example, if the UK were free to determine its own agricultural policy during

the transition period, it could opt to re-introduce a form of the deficiency payments support

mechanism that it used prior to its accession to the EU. Deficiency payments are a form of

counter-cyclical coupled payments and would not likely be constrained by any Bound Total

Aggregate Measurement of Support ceiling that the UK may include in its schedule of WTO

concessions. Coupled payments are permitted in the EU under the CAP although they are a

voluntary option for Member States and are subject to conditions including a total expenditure

ceiling. If UK farmers were able to receive more generous coupled payments during the

transition period, EU farmers might view this as unfair competition. Norway is a member of

the single market through its EEA membership, and provides support to its farmers at a much

higher level than in the EU, but does not enjoy duty-free access for its agricultural exports to

the EU. Any greater policy autonomy for the UK during the transition period may need to be

accompanied by some agreement on state aid rules including agricultural support policies.

However, this option begs the question how the UK can be both outside the EU, as it will be

after 29 March 2019 according to the Prime Minister’s Florence speech, and also adhere to the

Union acquis?63F

135

It would not be sufficient just to ‘extend’ EU law to the UK after Brexit because, after that

date, the UK will no longer be an EU member. To take an obvious point, if the UK leaves the

EU on 29 March 2019, it will no longer be a member of the Customs Union. Article 28(1) TFEU

reads: “The Union shall comprise a customs union which shall cover all trade in goods and

which shall involve the prohibition between Member States of customs duties on imports and

exports and of all charges having equivalent effect, and the adoption of a common customs

tariff in their relations with third countries”. The UK, as a third country, would clearly not be

a member of this EU Customs Union. To remain in a customs union with the EU would require

a separate (even if temporary) customs union agreement. 64F

136

Any transitional agreement would have to be a trade or association agreement

between the UK and the EU27 because the UK, at that point, would be a third country.

A mandate would have to be given to allow the Article 50 TEU negotiations to negotiate a

transitional trade agreement under Article 207 or a transitional association agreement under

Article 217 TFEU (the EEA agreement was negotiated as an association agreement under

134 The distinction is essentially between Union legislation which has relevance to the European Economic Area and

legislation which does not, though it must be recognised that the line is not always easy to draw. 135 See Frantziou and Łazowski (2017) on the complications of the transition period although they do not seem to

recognise that the UK would be a non-EU third country during this period. 136 See Holmes, P., “Staying in the Customs Union: Neither Soft Nor Simple”, Scottish Centre on European

Relations”, 11 July 2017 and Stojanovic, A., “Five things to know about a customs union”, Institute for

Government, 5 July 2017.

https://www.scer.scot/database/ident-2923

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Article 217 although it might be hard to justify this route in the case of a transitional

agreement). Some legal scholars debate whether such a mandate would be legal until the UK

had actually left the EU and become a third country. Negotiating a transitional trade agreement

that effectively replicated the Union acquis would in itself be a mammoth task, it could hardly

be just cut and paste. “The UK and EU will need to design an agreement whereby all EU

Regulations and Directives continued to apply in the UK with complete certainty. This includes

all the mutual recognition of testing and certification elements of the Single Market and the

free mobility of labour”.65F

137

There is also an international dimension. This option assumes that during the transition

period the UK is no longer an EU Member State but would be part of a (temporary) customs

union with the EU27. As a part of a customs agreement the UK would be required to adhere

to the FTAs entered into by the EU with third countries. While the UK might be very happy to

do this, it presumably would require individual negotiations with each FTA partner to revise

the agreements to recognise the non-EU status of the UK after 29 March 2019.

Even if Article 207/217 TFEU negotiations could be managed, the status of such an agreement

under EU law is not certain. Because it might cover issues on which EU member states retain

competence, national parliaments may have to be involved in ratification of the transition deal

on the EU side.66F

138 The Commission might provisionally apply those aspects that fell within its

sole competence from Brexit Day, but the whole architecture of this construction has a very

uncertain feel.

For these reasons, there are doubts whether this option (a new transitional trade

arrangement to come into effect immediately after March 29 2019) is indeed

feasible. The UK and the EU27 would be negotiating both a highly complex international

agreement and their future relationship at the same time. As Frantziou and Łazowski (2017)

observe: “A good transitional arrangement would have to resolve so many of the sticking

points in the negotiations that it would be almost as difficult to achieve as a permanent

arrangement”. They conclude that, if most features of membership are maintained in that

transition, it would make more sense to extend the two-year period laid down in Article 50

TEU to a more workable timeline for finding a durable solution.

3.5. EFTA/EEA membership as an interim arrangement

One possible way in which the UK might be bound by the EU acquis during the transition period

would be if it sought temporary membership of EFTA and the EEA. The main argument for this

solution is that the EEA is an already existing trade agreement with non-EU countries and thus

can provide the appropriate text. It would be similar to the ‘Norway’ model discussed in

Chapter 2, but with the proviso that it would be intended as a temporary solution for the

transition period. However, there are formidable scoping, legal and practical problems to

adopting this solution.

Joining the EEA agreement would maintain tariff-free trade on non-agricultural goods between

the UK and the EU27. It would allow continued time-limited membership of the EU single

market. But significant adaptation would still be necessary. EEA membership does not involve

a customs union with the EU. The EEA states are free to establish their own trade policies with

third countries. Border checks are still necessary to check on origin and for tax purposes.

Significantly, the EEA does not cover agri-food trade and EEA countries are free to

137 Winters, Holms and Szyszczak, op. cit. 138 “Furthermore, any international agreement between the EU and the state which has withdrawn defining their

future relationship would require ratification in the remaining Member States, unless the agreement were only

to cover matters falling within the exclusive competence of the European Union” (Carmona et al, 2017, p. 7).


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adopt their own agricultural and fisheries policies. If the UK and the EU27 wished to

maintain essentially the same trade relations in the transition period as now, it would be

necessary to extend the EEA agreement by adding a temporary customs union as well as a

bilateral agricultural agreement maintaining tariff-free trade.

Objections to the EEA model as the long-term framework for UK-EU27 trade relations were

outlined in the previous chapter. They include the fact that the UK would be required to

implement EU rules and regulations over which it had no say, that it requires continued UK

budgetary payments to cohesion countries for single market membership, and that it requires

acceptance of the four freedoms, including freedom of movement of labour. When viewing the

EEA model as a way forward for the transition period, these implications might be – possibly

– acceptable to the UK. But there are other, legal as well as practical, difficulties in the way of

this approach.

One set of legal arguments revolves around the issue whether the UK would, in fact, remain

a member of the EEA even though it had left the EU. The basis for this argument is that the

UK (along with all other EU Member States) has separately ratified the EEA agreement. Thus,

it would remain a member and remain within the single market unless it formally withdraws

from the EEA using the mechanism laid down in Article 127 of the agreement. Litigation was

brought in the UK courts to test that very point, but the application for judicial review was

considered to be premature. 67F

139 Critics of this argument point out that Article 126 of the EEA

agreement limits the territorial application of the agreement to the EU and to the participating

EFTA states. “In short, once the UK leaves the EU – and absent any other agreement – any

attempt to enforce the agreement would encounter significant legal objections in terms of its

material and territorial scope”.68F

140

However, it is argued that it would still be open to the UK to join the EEA which, given Article

126 of the EEA Agreement, would also require it to seek admission first to EFTA. First, note

the considerable practical difficulties in this scenario. It would involve the UK (a) seeking

membership of EFTA (b) applying to accede to the EEA under the terms laid out in Article 128

of the EEA Agreement (which requires an agreement between the contracting parties and the

state joining the agreement and for the agreement to be ratified by the contracting states in

accordance with their own procedures). Moreover, to replicate current market access

conditions, it would be necessary in addition for the UK (c) to negotiate additional bilateral

agreements with the EU to create a temporary customs union as well as continued free trade

in agricultural products, all to avoid additional trade costs during a transitional period which

one side says would not last longer than two years.

The various negotiations leading up to these agreements would all involve points of substance

and disagreement which may not simply be resolved by cutting and pasting existing text, for

examples, issues around the UK’s budget contribution to the EEA Financial Mechanism,

whether the UK would be allowed to invoke some of the EEA limits on freedom of movement,

increasing the size of the EFTA Court to include a UK judge, etc. As a result, observers such

as Jean-Claude Piris, former Director General of the Legal Service to the Council of the EU,

have argued that the time this will take and the procedural obstacles to be overcome do not

make the EFTA/EEA option a suitable vehicle for a transitional arrangement. 69F

141

139 Monckton Chambers, “Single market challenge: Adrian Yalland and Peter Wilding v SSEU (Article 127 EEA)”, 23

January 2017. 140 Armstrong, K., “Staying in the Single Market: Not so EEAsy?”, Brexit Time, 8 September 2017. 141 Piris, J.-C., “Why the UK will not become an EEA member after Brexit”, E!Sharp, September 2017.

https://www.monckton.com/single-market-challenge-adrian-yelland-and-peter-wilding-v-sseu-article-127-eea/

https://brexittime.com/2017/09/08/staying-in-the-single-market-not-so-eeasy/

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This view would appear to be shared by the UK. In response to a question whether continuing

membership of the single market might be worse than membership of the EU, the Secretary

of State for Exiting the EU, David Davis, replied: 70F

142

“The simple truth is that membership of the European Free Trade Association, for example,

which would be one way to retain EEA [European Economic Area] membership, would do

exactly that: it would keep us within the acquis, and it would keep us within the

requirements of free movement, albeit with some limitations, but none of those have

worked so far. In many ways, it is the worst of all outcomes. We did consider it—I gave it

some considerable thought, maybe as an interim measure—but it seemed to me to

be more complicated, more difficult and less beneficial than other options” (bolding added).

Some legal scholars have tried to identify a possible legal pathway using the EFTA/EAA route

which, even if convoluted, might be feasible. Armstrong has pointed out that “there is nothing

in principle to prevent the EFTA Council preparing a decision unanimously approving UK

membership of EFTA that would come into force simultaneously with the UK’s withdrawal from

the EU. At the same time, the UK’s accession to the EEA Agreement could be agreed by the

EEA Council and signed by the contracting parties ready for formal ratification. Pending

ratification, an exchange of letters could secure its provisional application without the hiatus

that Piris anticipated”.71F

143

However, it may not be possible for the UK both to join EFTA (in order to accede to the EEA

agreement), and to be in a customs union with the EU. 72F

144 Article 56 of the EFTA Convention

deals with accession and association. Under Article 56(3), there is an obligation on an acceding

state to apply “to become a party to the free trade agreements between the Member States

on the one hand and third states, unions of states or international organisations on the other”.

This would mean that the UK would need to apply to join the 27 FTAs that EFTA countries

currently have with 38 countries. 73F

145 But the UK could not apply to join these FTAs if it were

at the same time in a customs union with the EU; a customs union with the EU would oblige

it instead to be a party to the EU’s FTAs with third countries. The conclusion is that, in principle,

it is not possible for an EFTA state to also be in a customs union with the EU, unless

the EFTA countries were prepared to waive this requirement for a temporary period to facilitate

the UK transition out of the EU.

3.6. A temporary customs union as an interim arrangement

As noted earlier, the UK proposed in its future customs arrangements partnership paper to

assist in transition “a new and time-limited customs union between the UK and the EU Customs

Union, based on a shared external tariff and without customs processes and duties between

the UK and the EU” (HM Government 2017b). This temporary customs union would be limited

in time, and could be one among a number of interim arrangements. If agreement on an

extension of the full Union acquis seems neither feasible nor practical during the Article 50

negotiations, this is a possible fall-back position on which both sides could agree.

The benefit of a temporary customs union is that it would avoid the requirement for

rules of origin checks on goods traded between the two parties. From the UK’s

perspective, it might be a way to give it continued market access to the EU’s FTA agreements

142 Davis, D., ”Membership of the European Economic Area”, House of Commons Hansard, 7 September 2017. 143 Armstrong, K., “Staying in the Single Market: Not so EEAsy?”, Brexit Time, 8 September 2017. 144 Hughes, K., “Scotland’s EU Single Market Options: Some challenges from the trade side”, Centre on

Constitutional Change, 15 January 2017. 145 EFTA, “Global trade relations”.

http://hansard.parliament.uk/commons/2017-09-07/debates/2179DA56-291E-44C0-9B50-A7A2CA5F4952/MembershipOfTheEuropeanEconomicArea

https://brexittime.com/2017/09/08/staying-in-the-single-market-not-so-eeasy/

http://www.centreonconstitutionalchange.ac.uk/blog/scotland%E2%80%99s-eu-single-market-options-some-challenges-trade-side

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in the absence of ‘grandfathering’. From the EU’s perspective, EU farmers would continue to

benefit from the preferential trade transfer on exports to the UK market.

However, a customs union on its own would not avoid the need for border controls.

They would need to be re-introduced to implement phytosanitary checks, check tax

compliance and enforce transport restrictions. A customs union would not cover trade in

services. It would also prevent the UK from implementing its own trade agreements with third

countries, although whether it would be able to negotiate these during the transition period

would be a matter for the Article 50 negotiations.

Whether such a temporary customs union would be inconsistent with WTO rules on customs

unions and free trade areas (set out in GATT Article XXIV and its interpretative note and

attached Understanding) has been debated. 74F

146 Article XXIV makes provision for “interim

agreements leading to the formation of a customs union or a free trade area” and specifies

that approval of such interim agreements is dependent on including a plan and schedule for

the formation of such customs union or free trade area within a reasonable length of time.

The idea here is to cater for agreements which might initially only cover a portion of total

trade between the partners, but which to be consistent with WTO rules should eventually cover

substantially all trade.

A temporary UK-EU customs union would not be an interim agreement in this sense, although

it would be intended as a temporary arrangement. It would presumably cover 100% of trade

from day 1 (the day after Brexit Day). The fact that the parties intended to replace it with a

free trade agreement within a short period of time is irrelevant to its compatibility with WTO

rules. One precedent is the customs union entered into by the Czech and Slovak Republics in

1993 following the breakup of Czechoslovakia. The EU made the customs union a condition

for transferring Czechoslovakia’s associated status with the EU to the successor states, and

the customs union was dissolved when both countries acceded to the EU (and the EU Customs

Union) in 2004.

From the agricultural point of view, the main drawback of a temporary customs

union is that it would not address regulatory barriers to trade arising from food

safety, veterinary and plant health checks. Here the UK has proposed a separate

agreement on “regulatory equivalence on agri-food measures, where the UK and the EU agree

to achieve the same outcome and high standards, with scope for flexibility in relation to the

method for achieving this….Providing the UK and the EU could reach a sufficiently deep

agreement, this approach could ensure that there would be no requirement for any SPS or

related checks for agri-food products at the border between Northern Ireland and Ireland”.

This proposal was put forward as a way of avoiding a hard border on the island of Ireland as

part of the long-term relationship. It could equally well be brought forward and included as a

part of a transition agreement. However, this solution would seem to be ruled out by the

insistence by the European Council in its guidelines and by the European Parliament that the

UK would be required to accept the entire Union acquis during the transition period. 75F

147

Although an agreement on regulatory equivalence on agri-food measures would avoid the

need for a high proportion of customs checks, there would continue to be a need for checks

on other products, including sensitive products such as chemicals, electronic goods, toys and

146 This view was expressed in The Economist in its commentary on the customs position paper: “Furthermore, the

idea of a temporary tariff-free deal is unconvincing: once Britain leaves the EU, non-discrimination rules mean

that the two can avoid bilateral tariffs only by scrapping them for all members of the World Trade Organisation. 147 Recall the European Council guidelines that “preserving the integrity of the Single Market is an absolute priority.

That excludes participation in any agreement with the UK on a sector-by-sector approach”.

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cosmetics. Therefore, in the context of avoiding a hard border on the island of Ireland, it has

been argued that, as well as a customs union with the EU, it would be beneficial if the UK were

to remain in the single market at least for goods alone. 76F

148 This solution would avoid borders

not only on the island of Ireland but for UK-EU27 trade generally, and would enable existing

supply chain arrangements linking companies in both the UK and the EU27 to continue

unaffected. While the UK might not be happy with this as a long-term solution (it would not

give it access to the single market for capital and services), it might be more attractive in the

transition period than a simple tariffs-only free trade agreement which would be the likely

alternative. While the UK would remain under the jurisdiction of the CJEU as regards trade in

goods and would likely be required to make a financial contribution towards economic and

social cohesion in the single market, it would be in a position to control immigration and it

would avoid the ‘cliff-edge’ scenario of full border controls after 29 March 2019 which it is

highly unlikely to be able to manage.

3.7. A free trade agreement as an interim arrangement

The most minimal step to avoid a ‘hard’ Brexit outcome after Brexit Day would be

for the UK and the EU27 to agree to establish a tariffs-only FTA, with the proviso that

the two sides would continue to discuss how to deepen and extend that FTA in the future to

include elements of regulatory cooperation at a later stage. A bilateral FTA could avoid the re-

introduction of MFN tariffs on UK-EU27 trade, but it would not avoid the need for extensive

customs clearance and health checks and the introduction of rules of origin. While a bilateral

FTA with 100% coverage of tariff lines might seem straightforward, given that the UK and the

EU27 start from the position where there are no tariffs, no other EU FTA (apart from the

Economic Partnership Agreements with developing countries) provides 100% tariff-free access

to the EU market for the agricultural sector. Instead, preferences are provided for limited

quantities of trade at reduced duties. The more that either party tried to ‘fine-tune’ a bilateral

FTA in this way, the longer the time it would take to negotiate and the greater the risk that it

might not be in place on Brexit Day. However, a tariffs-only FTA could be agreed by the Council

and Parliament alone, without the need for Member State ratification, because tariff policy is

exclusively a Union competence.

3.8. Rescheduling the phasing of Article 50 negotiations

Unless agreement to implement a transitional arrangement were reached (or agreement for

the UK to remain an EU Member State until the final trade agreement were concluded as in

the previous option) at the latest by early 2018 during the Article 50 TEU negotiations, traders

would be forced to undertake contingency planning and to invest in new systems and

personnel to cope with the increased possibility of a ‘cliff-edge’ Brexit. The additional

uncertainty arising from any further delay would impact negatively on trade flows, including

the possibility of adverse exchange rate movements from the perspective of EU exporters.

Traders will hesitate to enter into longer-term contracts with customers as long as there

continues to be uncertainty about future trade conditions after 29 March 2019.

The longer the time that it takes to start discussing and to reach agreement on the

nature of any transitional period, the less valuable it will be to businesses on either

side of the future UK-EU27 border. Uncertainty about the trade arrangements which might

be in place following Brexit Day is already having a negative impact on the decision-making

of businesses and firms that depend on the UK market, including food firms and farmers, not

148 This suggestion has been made by Kevin O’Rourke, “What if it was the Europeans picking the cherries?”, The

Irish Economy, 7 October 2017.

http://www.irisheconomy.ie/index.php/2017/10/07/what-if-it-was-the-europeans-picking-the-cherries/


182

least because of the depreciation of sterling and subsequent exchange rate volatility. 77F

149 Note,

however, that even quickly reaching an agreement on transitional arrangements would not

provide full legal certainty given the EU position that nothing is agreed until everything is

agreed. So traders entering commitments in 2018 on the assumption that the terms of any

transitional arrangement would apply after 29 March 2019 are making a bet on the successful

conclusion of the entire set of negotiations.

Under the European Council guidelines, discussions on the next set of negotiating directives

cannot start until satisfactory progress has been made on the three issues - citizens’ rights,

the financial settlement, and the Irish border - which make up the first phase of the

negotiations. It had been hoped that the European Council meeting in October 2017 might be

in a position to confirm that sufficient progress had been made and to issue a new negotiating

mandate. The European Council noted that progress had been made on some of the issues in

the first phase of the negotiations but concluded that, at this time, insufficient progress

had been made in the first phase of the negotiations to move on to the second.

Some argue that the current uncertainty works to the benefit of the EU27. The longer it takes

for the outlines of a deal to become clear, the greater the uncertainty, and the more likely

that UK firms will respond to the possibility of no deal or a bad deal by planning a redirection

of investment or even a relocation. For some governments, the prospect of attracting financial

firms currently headquartered in London may make this an acceptable risk. Others argue that,

because the UK has in relative terms more to lose from a disorderly Brexit than does the EU27,

the economic pressure created by the current phasing make it more likely that the UK will

come forward with acceptable offers on the three preliminary issues, most notably the financial

settlement.

If indeed these motives influence the EU negotiating position, they are extremely short-sighted

and have the potential to build up much more serious problems in the future. Even though the

UK has decided to leave the EU, cooperation between the two parties will be essential in

meeting many of the future challenges facing Europe, including security threats, terrorism,

migration, climate change and financial stability. Poisoning this relationship in the longer-term

by refusing to negotiate in good faith would make a very poor bargain.

There are other arguments in favour of a more pro-active negotiating stance by the EU. 78F

150 The

sequencing of the negotiations is not a legal obligation. Nothing in the text of Article 50 TEU

forbids discussing the withdrawal arrangement and the future framework simultaneously. The

sequencing is a tactical choice of the EU, which suggests it should be assessed on the basis of

its benefits and costs.

There are costs associated with maintaining the current phasing of the negotiations. In the

first phase, the UK is being pressed to make commitments, but it is getting nothing in return.

Negotiating the two phases in parallel would allow trade-offs and linkages between issues to

be made which would make it easier for the parties to reach a compromise agreement, not

least on the question of the Irish border. The European Council itself in its guidelines has said

that nothing is agreed until everything is agreed, so it is not the case that the UK could pocket

149 “Industry Groups Call for a Clear and Predictable Transitional Arrangement in the Brexit Process”, press release

from a group of industry associations representing global companies operating in both the UK and the EU27, 11

October 2017. It noted that “they are increasingly challenged by the regulatory and operational complexities as

well as the economic risk associated with Brexit”. 150 These arguments were put forward in Delhouse, F., “Why the sequencing of the Brexit negotiations should be

abandoned”, Egmont, 28 September 2017.

http://www.transatlanticbusiness.org/wp-content/uploads/2017/10/Press-Release-Transitional-Period-2017-October-11.pdf

http://www.egmontinstitute.be/in-the-brexit-negotiation-2/

http://www.egmontinstitute.be/in-the-brexit-negotiation-2/


183

concessions made, for example, on the transition period without fully meeting the EU27’s

expectations on citizens’ rights and the financial settlement.

Newspaper reports suggest that the EU’s negotiator, Michel Barnier, did ask the EU27 to give

him a new mandate to discuss transition arrangements at the October summit. In the event,

there was at least a blocking minority of countries that were opposed to this. 79F

151 However, the

Council has agreed that internal preparatory discussions in relation to the framework for the

future relationship and on transitional arrangements should be started. This is an important

signal which should be fully exploited.

This study makes the strong recommendation that the European Parliament should use its

influence to encourage the Council with the Union negotiator to rapidly bring forward

specific proposals for the transition with a view to clarifying what it believes would

be the minimum requirements to ensure that trade can continue to take place with

the UK as it does today in the single market for the duration of the transition period, and

what it sees as the appropriate balance of rights and obligations during this period. Not all of

the Union acquis is necessary in this regard.

A critical issue here is whether UK membership of the CAP and the Common Fisheries

Policy (CFP) will be deemed necessary as a prerequisite for continued free trade in

agricultural and fishery products during the transition period. With respect to an

obligation to respect CAP legislation, the EU’s previous trade agreements are ambiguous.

Norway and Switzerland do not respect CAP legislation and do not enjoy fully-liberalised trade

in basic agricultural products with the EU. With Turkey and Ukraine there is some presumption

that these countries will align their agricultural policies with the CAP and that this will facilitate

if not be an actual prerequisite for fully liberal agricultural trade. However, Georgia has fully

tariff-free agricultural trade with the EU despite having no intention of adopting the CAP

legislation. Even though the FTA agreement with Canada did not fully liberalise agricultural

trade, the reason for excluding certain tariff lines was due to the economic sensitivity of the

sectors concerned and not because of a demand that Canada should align its agricultural policy

with that of the CAP. On the basis of these precedents, an obligation to base its agricultural

policy on CAP legislation would not appear to be a requirement either for a future trade

arrangement with the UK or for a transition agreement. However, some agreement on state

aid rules including agricultural support would be necessary. On the fisheries side, Sobrino

Heredia (2017) note that acceptance of the CFP has not been a feature of the EU’s FTAs but

point out that fisheries governance would require a bilateral fisheries agreement to enable

preferential access to waters and resources.

Another issue which would require clarification, both in any future trade agreement

and in the transition, would be the status of the legal protection for EU27

Geographical Indications (GIs) in the UK (and vice versa). The UK, under the European

Union (Withdrawal) Bill, will implement the same legislative framework for GIs as the EU one,

but there will still be a need to ensure mutual recognition of protected GIs in each other’s

jurisdiction. One way to achieve this would be if the UK were to join the Geneva Act of the

Lisbon Agreement on Appellations of Origin and Geographical Indications (Matthews, 2015).

The preparatory work should also clarify whether these minimum requirements are likely to

include areas which fall within the competence of Member States, and thus whether a

transition agreement would also have to be ratified by Member States as well as the Council

and Parliament. These steps are in the interests of EU27 businesses and consumers as much

as they are in the interest of the UK.

151 “Brexit: stop the 'games' over the bill and get on with EU deal, says Denmark”, The Guardian 8 October 2017.

“Brexit talks stutter, but EU leaders might give May break”, Reuters, 9 October 2017.

https://www.theguardian.com/politics/2017/oct/08/denmark-dismisses-eu-wrangling-brexit-divorce-bill-game?utm_source=esp&utm_medium=Email&utm_campaign=GU+Today+main+NEW+H+categories&utm_term=247150&subid=22642522&CMP=EMCNEWEML6619I2


184

Ultimately, the terms of a withdrawal agreement under Article 50, including any

provisions it might contain with respect to transitional trade arrangements, must be

ratified by both sides. The EU procedure for ratification requires a qualified majority in the

Council and the consent of the European Parliament. In the UK, the Government will bring

forward a motion on the final agreement to be voted on by both Houses of Parliament before

it is concluded. Any new treaty that the UK would agree with the EU would also be subject to

the provisions of the Constitutional Reform and Governance Act 2010 before ratification.

However, the European Union (Withdrawal) Bill provides the UK Government with a further

limited power to implement the contents of any withdrawal agreement reached with the EU

into UK domestic law without delay, where this is necessary to ensure that the UK is ready to

begin the new arrangements from the date of exit (UK DExEU 2017). Some legal scholars

argue that a further referendum would be required under UK law to approve the agreement if

it provides that a EU body or institution can impose a requirement or obligation on the United

Kingdom (Kouroutakis 2017).

What would happen in the event of a failure to ratify by either side is uncertain, but it would

certainly increase the chances that the UK would leave the EU without an agreement and thus

a ‘hard’ Brexit.


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4. Protecting agricultural interests following Brexit

KEY FINDINGS

The EU has gained considerable experience in recent years in the management

of adverse shocks to agricultural markets which can be drawn upon in

designing possible responses to a negative Brexit shock. They include the use of

safety-net intervention; targeted aid; mobilisation of the crisis reserve; advancing

direct payments; making use of the income stabilisation tool; permitting flexibility in

state aids; and facilitating supply management.

Farmers and food businesses in the EU27 will need support to adjust to the

structural consequences of a ‘hard’ Brexit. This might include the provision of

adjustment assistance; greater use of financial instruments; a strengthened

promotion policy; and improved access to third country markets.

A specific market access concern is how UK TRQs will make provision for traditional

EU27 export flows, and vice versa for EU27 TRQs. Merely splitting the EU TRQs

does not go far enough to protect the interests of EU producers to access the

UK market in the event of a ‘hard’ Brexit.

The focus in this chapter is on possible responses to the negative impacts of a ‘hard’ Brexit

for the EU27 agricultural sector. These negative impacts were described in Chapter 2. They

include the re-introduction of tariffs on UK-EU27 agri-food trade, the loss of the preferential

trade transfer on sales to the UK market, the additional costs including indirect costs of

customs and regulatory checks at borders, the likelihood of immediate supply chain disruptions

because the necessary systems will not be up and running, and the potential for a further

sharp depreciation in the value of the UK currency. Responses to these negative impacts can

take two forms. The first consists of attempts to avoid the worst costs of a ‘hard’ Brexit by

shaping the Article 50 negotiations themselves; this response was examined in Chapter 3. The

second response examines the use that might be made of existing or new CAP instruments to

help offset the adverse consequences for the EU27 farming sector that might follow from the

outcome of the Article 50 TEU negotiations or from a failure to bring these to an agreed

conclusion. This is the focus of this chapter.

At the time of writing, there is no guarantee that the negotiating outcomes discussed in

Chapter 3, which would allow agri-food trade to continue in the same way as now and would

avoid the adverse consequences of a ‘cliff-edge’ Brexit, will be agreed. There is still the

possibility that the negotiations could fail to reach agreement, and that the UK would cease to

be an EU Member State without any agreement – a ‘disorderly’ Brexit, with all of the disruption

to trade that would imply. It is therefore also appropriate to examine the possibilities to use

instruments under the CAP to cushion producers from these adverse impacts.

As a general point, the relevant instruments to address an adverse shock would be

expected to differ depending on the nature of the shock and whether it is expected

to be temporary or represents a structural shift in external trading relations. In the

case of a temporary shock (such as a drop in market prices due to specific market conditions),

the primary focus will be on the safeguarding of producer incomes. For a structural shift, it is

more important to emphasise instruments which help farmers to adjust to this change rather

than to offset the impact of the change (which has the danger that it fossilises existing

production and marketing structures rather than encouraging farmers, processers and traders

to begin the necessary adjustments). A ‘hard’ Brexit is likely to involve both elements. The re-

introduction of additional trade costs, a further depreciation of sterling and reduced


186

attractiveness of the UK market (due to unilateral decisions by the UK to reduce applied tariffs

or to enter into free trade agreements with third countries which strongly liberalise agricultural

trade) represent a structural change in trading relations which will require adjustment by EU

producers. The initial lack of preparedness will, in addition, cause temporary but potentially

severe disruption to trade flows and hence producer incomes.

Although the displacement of EU27 exports destined for the UK market in the event of a ‘hard’

Brexit is likely to have a negative effect on prices within the EU27 common market as a whole,

some Member States will be more exposed to disruption than others, particularly in the event

of a further depreciation of sterling, because a higher share of their agricultural exports and

agricultural output is currently sold on the UK market. The uneven distribution of the

negative price impacts suggests that general market support instruments may need

to be accompanied by more targeted measures in the immediate aftermath of a

‘hard’ Brexit.

4.1. Support in the case of market disturbance

The EU has gained considerable experience in recent years in the management of adverse

shocks to agricultural markets, specifically in the context of the response to the Russian

embargo on exports of certain EU foods to Russia and to the drop in milk prices in 2014-2016.

Use of safety-net intervention. The EU has the possibility to acquire stocks into

intervention, or to pay firms for private storage, in order to withhold product from the market

and to strengthen producer prices. This instrument is most effective when dealing with

temporary or cyclical market disruptions when there is a reasonable expectation

that market prices will recover within a short period of time. The difficulty with the use

of intervention is that the build-up of intervention stocks can act to depress market sentiment

and to delay the recovery in market prices, as arguably has been the case following the build-

up in skim milk powder intervention stocks in the past few years. It also acts to delay

adjustments in production where the shock is likely to be permanent (as would be the case of

a ‘hard’ Brexit) and where there is a need to facilitate and assist farmers to take advantage of

alternative opportunities.

Targeted aid. During the milk crisis the Commission made available national envelopes to

Member States to support the dairy sector, having particular regard to those Member States

which had been most affected by market developments. It later introduced a scheme of

conditional adjustment aid to be defined and implemented at Member State level using a menu

of measures proposed by the Commission (amounting to €350 million that Member States

were allowed to match with national funds, thus potentially doubling the level of support being

provided to farmers). The principles behind this arrangement – targeting of funds to

Member States most adversely affected, co-financing between the Union and

Member States, and flexibility of Member States to choose from a menu of measures

proposed by the Commission - would seem very suited to deal with post-Brexit

disruption.

Mobilisation of the crisis reserve. One of the innovations in the 2013 CAP reform was the

creation of a €400 million (in 2011 prices) crisis reserve, which is replenished annually by

withholding a fixed percentage of direct payments to farmers in receipt of payments above a

certain level. If the reserve is not used in any particular year, that money is added to the

direct payments that the affected farmers receive in the following year. To date, it has not

been necessary to make use of the crisis reserve because other sources of funding were

available within the CAP budget to fund the crisis measures implemented in recent years.

There is also reluctance among Agriculture Ministers to trigger payments from the reserve


187

because it effectively represents a redistribution of payments from one group of farmers to

another. Nonetheless, the instrument exists and its use could be justified if there were

clear evidence that some groups of farmers in the EU27 are more adversely affected

by a ‘hard’ Brexit than others.

Advancing direct payments. The first instalment of direct payments is paid to farmers on 1

December in each year, although under existing rules Member States can pay up to 50% of

their direct payments envelope to farmers from 16 October, provided that the necessary

controls have been carried out. During the dairy crisis this percentage was increased to 70%.

The payment date for area and animal-related payments for rural development (such as agri-

environment, organic farming, areas of natural constraints, animal welfare) can also be

brought forward and during the milk crisis a higher percentage of the total payment was

allowed to be made in the first payment. These measures can provide some relatively

swift, but temporary, relief to farmers’ cash flow and could be considered again as

a possible response to the negative short-term fall-out from a ‘hard’ Brexit.

Income stabilisation tool. Member States/regions already have the option to include an

income stabilisation tool in their Rural Development Programmes. This risk management tool

supports farmers facing a severe drop in income (minimum 30% loss compared to the three

previous years). Only a few Member States have programmed this tool, but it could be

introduced by others with the next modification of Rural Development Programmes.

Agreement has been reached in the trilogues on the Omnibus Regulation to make the income

stabilisation tool a more attractive option. More widespread adoption could provide an

additional safety net for farmers in the event of a ‘hard’ Brexit.

Flexibility in state aid rules. Member States have the possibility of providing national

funding under the de minimis rules (below €15.000 for agricultural primary production or

€200.000 for marketing and processing activities over three years). For farm aid, there is a

national cap that total de minimis aid cannot exceed 1% of annual output. These rules were

relaxed during the milk crisis in two ways. Member States could give aids to farmers voluntarily

freezing or reducing production (compared to a reference period) up to €15.000 per farm per

year (without national ceiling) in the form of a grant, loan or guarantee (for the dairy, pig

meat and fruit and vegetable sectors). Member States could also introduce a state aid scheme

for access to finance to bridge a liquidity gap in the form of loans or guarantees (for the dairy,

pig meat and fruit and vegetable sectors). Temporary derogations could again be

considered in the context of a ‘hard’ Brexit, although it would be important to avoid

that aids to farmers in one Member State would be at the expense of farmers in

another. Both of the recent derogations were justified under Article 107(3) TFEU which

permits aid to facilitate the development of certain economic activities or of certain economic

areas, where such aid does not adversely affect trading conditions to an extent contrary to

the common interest.

Member States also have the possibility to provide national aids which meet the

criteria set out in the Agricultural Block Exemption Regulation. These generally cover

measures which are available within Rural Development Programmes (RDPs) and are co-

financed by the EAFRD (for example, aid for investments, for agri-environment-climate

schemes, for organic farming, or for the participation in quality schemes) which can also be

nationally financed. Under certain conditions, state aids can also cover promotion, the closure

of production capacity and, under strict conditions, rescue and restructuring aid for companies

in severe financial difficulties, etc.


188

Supply management. In an early response to the Russian embargo which had a particularly

adverse impact on perishable crops such as fruit and vegetables, the Commission provided

support for the withdrawal of surplus volumes from the market with a view to providing short-

term relief. Depending on the market situation immediately after Brexit, the introduction of

similar measures could be justified on a temporary basis.

4.2. Support for adjustment

Provision of adjustment assistance. The EU created in 2007 the European Globalisation

Adjustment Fund (EGF) as a flexibility instrument in the EU budget for interventions in case

of mass redundancies caused by major changes in global trade. It aims to help dismissed

workers find new jobs through a package of tailor-made services. Eligible actions include:

tailor-made training; job-search assistance; entrepreneurship promotion; and measures

addressing the needs of disadvantaged or older workers. The EGF cannot be used for passive

social protection measures such as unemployment allowances or retirement pensions. Nor can

it fund the restructuring of a company or a sector. From May 2009 to December 2011, the

EGF was also able to support workers who had lost their jobs as a result of the financial and

economic crisis.

In proposing the continuation of the EGF for the period 2014-2020, the Commission proposed

that, under specific conditions, Member States would be able to request funding for agricultural

sectors, products or regions significantly affected by new trade agreements to help farmers

adapt to a different market situation. The objective would be to assist them to become

structurally more competitive or to facilitate their transition to non-agricultural activities. Up

to five sixths of the proposed budget could be used to this end.

This proposal was rejected by both the Council and the European Parliament. One major

objection was the linkage of assistance to the conclusion of trade agreements which could

have adverse effects for EU farmers. It was argued that the resources available were totally

inadequate relative to the potential costs of trade liberalisation, and that it could act as a fig-

leaf to encourage the Commission to negotiate trade agreements at the expense of the

agricultural sector. There was also criticism from workers’ representatives that the high

amount to be reserved for the agricultural sector would reduce the funds available for its

original purpose. 80F

152

Whether the EGF is the right institutional framework or not, making available personalised

advice, mentoring and coaching to farmers on their options in the event of a severe

drop in market prices due to a loss of access to the UK market, as well as training in

entrepreneurship and business creation, could be a useful addition to the policy

toolkit to address the impact of a ‘hard’ Brexit. Already, some farm advisory services

provide services of this nature. It could be valuable to extend the remit of the Farm Advisory

Service foreseen under the CAP Horizontal Regulation from its current focus on meeting cross-

compliance and greening standards to also include socio-economic advice.

Greater use of financial instruments. Adjustment measures on farms will require access

to capital. Financial instruments aim to create incentives for economic operators to provide

finance to final recipients such as farmers. They are intended to address an identified market

gap, i.e. areas where banks are unwilling to lend and/or where the private sector is unwilling

to invest, for instance in small farms or new agricultural businesses without sufficient credit

history or assets as collateral. Their main attraction is that they can leverage additional private

resources for investment projects when public funds are limited. The constraint on their use

152 Matthews, A. “Farmers and the European Globalisation Adjustment Fund”, October 25, 2011.

http://capreform.eu/farmers-and-the-european-globalisation-adjustment-fund/


189

is that the money is expected to be repaid, so they are only suitable for financially viable

projects, i.e. those which are expected to generate enough income or savings to pay back the

support received. Financial instruments can take the form of loans, guarantees or equity, and

may be managed by national or regional banks, international bodies such as the European

Investment Bank or the European Investment Fund, by financial intermediaries, and (for loans

and guarantees only) by RDP managing authorities.

Loans supported by financial instruments can make finance available to farmers where none

is offered commercially (e.g. from banks), or on better terms commercially (e.g. with lower

interest rates, longer repayment periods, or with less collateral required). Following the

disruption caused by a ‘hard’ Brexit, there is likely to be an increased demand for

this type of finance as farmers seek alternative opportunities and traders seek

alternative markets. Additional flexibility in the state aid guidelines may be needed to ensure

that financial instruments can be made fully operative for farmers.

4.3. Strengthened promotion policy

Information and promotion schemes. Support is available under the CAP through a range

of instruments towards the provision of information and promotional actions for agricultural

products. Following a debate initiated by a Commission Green Paper in July 2011 and a

Commission Communication in March 2012, a new Regulation (EU) No 1144/2014 was adopted

and became applicable from 1 December 2015. 81F

153 This legislation greatly enhanced the scope

of the CAP’s promotion policy by expanding the scope of measures, beneficiaries and eligible

products that could be funded and by significantly increasing the aid for information and

promotional activities from a budget of €61 million in 2013 to €111 million for 2016 and up to

€200 million in 2019. Among the objectives of this legislation is to help restore normal market

conditions in the event of serious market disturbance, loss of consumer confidence or other

specific problems. Each year, the Commission defines the strategic priorities for promoting EU

farm products and funding criteria in an annual work programme outlining the thematic

priorities for support including products and possible markets. Proposals submitted for funding

are examined by independent experts, following the award criteria defined in the annual work

programme.

Following a ‘hard’ Brexit, there would be a case to target support for promotional

activities outside the EU on those products and countries most adversely affected.

This might be done by reviewing the thematic priorities for support or by revising the award

criteria. Targeting on products is already a feature of the thematic priorities. For example,

around nine topics were identified for support in the 2017 Work Programme of which two

focused on products that were particularly affected by the Russian embargo (Table 4). The

value of this scheme was underlined by the response to the specific priority for milk and pig

meat products following the 2016 call, where the budget requested was four times higher than

the indicated budget in the annual work programme.

The award criteria stated for the 2017 Work Programme covered four elements unequally

weighted: Union dimension, technical quality, management quality, and budget and cost-

effectiveness. It could be decided to add criteria in future Programmes which in some way

take account of the vulnerability of different Member States to the adverse impacts of a ‘hard’

Brexit.

153 More information is provided in the European Parliamentary Research Service Briefing EU agricultural promotion

measures, June 2016.


190

Table 15: Topics and actions for support in the 2017 Work Programme for

information and promotion measures for agricultural products

NO. TOPIC

1 Information provision and promotion programmes aiming at increasing the

awareness and recognition of certain Union quality schemes

2 Information provision and promotion programmes aiming at highlighting the

specific features of agricultural methods in the Union and the characteristics of

European agricultural and food products, and other quality schemes

3 Information provision and promotion programmes targeting one or more of the

following countries: China (including Hong-Kong and Macao), Japan, South Korea,

Taiwan, south-east Asian region or India


following countries: USA, Canada or Mexico


following countries: USA, Canada or Mexico

6 Information provision and promotion programmes targeting geographical areas

other than those included under Topics 3, 4 and 5.

7 Information provision and promotion programmes on milk products, pigmeat

products or a combination of those two targeting any third country

8 Information provision and promotion programmes on beef products targeting any

third country.

A Programmes increasing the awareness of Union sustainable agriculture and the

role of the agri-food sector for climate action and the environment

Source: Commission Implementing Decision of 9.11.2016 on the adoption of the work programme for 2017 of

information provision and promotion measures concerning agricultural products implemented in the internal market

and in third countries, C(2016) 7100.

Export market credit guarantees. Promoting EU products in overseas markets can help to

create a demand, but taking advantage of new outlets and entering new markets takes time

and causes great uncertainty and risks. Strengthening promotion policy under the CAP only

provides a partial solution to this problem, as it does not cover commercial risks. Often, the

private banking sector does not provide coverage of this kind of risk either. Certain Member

States have set up export credit insurance systems to support agri-food businesses, but there

are no export credit, export credit guarantee or insurance programmes operated at the EU

level. An Export Credit Group under the Council reviews the export credit support schemes of

Member States to ensure that under the EU's common commercial policy, Member States do

not undercut each other internationally and create unfair competition.

The Commission, together with the European Investment Bank, have been examining the

possible benefit and feasibility of setting-up an export credit guarantee facility at the EIB for

agricultural exports to new or risky markets. Commissioner Hogan made reference to the

conclusions of their study when reporting to the June 2016 AGRIFISH Council meeting. 82F

154 It

concluded that an export credit guarantee tool does not offer short term relief to supply in

crisis situations. It could possibly support the internationalisation of the EU agri-food sector

for those companies and export destinations for which access to trade finance is difficult.

However, Member States have been slow in providing a clear economic case to introduce such

154 Hogan, P., “Speaking note to AGRIFISH Council (June 27, 2016) in Luxembourg”, 27 June 2016.

https://ec.europa.eu/agriculture/sites/agriculture/files/docs/speeches/hogan-2016-06-27-agricultural-markets.pdf


191

a tool for agriculture at the EU level. At a meeting of the Special Committee for Agriculture on

20 June 2016, Member States were asked to reply to two questions, on the value added of an

EU credit guarantee scheme, and on its operational management. 83F

155 To date, it does not

appear that the Committee has returned to address this issue. One way to advance this file

could be to establish European guidelines on the use of export credits to encourage

Member States to provide this kind of tool.

Promotion on the internal market. While promoting the export of EU products outside the

EU is an obvious response to the loss of access to the UK market in the event of a ‘hard’ Brexit,

the potential to stimulate domestic consumption should not be overlooked. This could be

particularly useful in the case of fruit and vegetables where average intake in the EU

appears to be below recommended nutritional levels. There may be scope under the School

Scheme for Milk, Fruit and Vegetables to increase the offtake of these products under this

Scheme.

4.4. Improved access to third country markets

Some may draw the conclusion from the experience of the Russian embargo and a ‘hard’

Brexit, if it occurs, that relying on third country markets is too risky and that the appropriate

policy response should be to reduce the dependence of EU producers on third country markets

and to concentrate on domestic, or even local, markets. Reducing exports to third country

markets would be very counter-productive and would further impoverish the

farming community. As it is, the vast majority of farm and food products supplied on the

EU market (mostly from domestic production but also from imports) are consumed within the

EU. Only 4.2% of agricultural products were exported outside of the EU in 2011, and only

6.9% of food, beverages and tobacco products. 84F

156 These are either high value products which

are sold at premium prices (e.g. products with a quality mark) or lower-valued products for

which there is limited consumer demand within the EU and where overseas markets yield a

higher return (e.g. certain poultry parts). If farmers were unable or discouraged from

producing these products, and instead had to substitute alternative products which could only

be sold on the EU market, the net impact would be lower returns to their labour, capital and

land inputs. Indeed, the only way to entirely remove the risk of depending on others is to

return to self-sufficient households. Even if this were deemed a practical option, that approach

magnifies the risks of depending on own production. Instead, the way to address risk on third

country markets is to strengthen the rules governing international trade and to diversify

markets to reduce the risks of over-dependence on any one buyer.

Free trade agreements. The EU is a strong supporter of the multilateral rules-based system

under the governance of WTO rules. The rules governing agricultural trade were strengthened

in the WTO Agreement on Agriculture signed at the conclusion of the Uruguay Round of trade

negotiations in 1994. Although another round of negotiations to further liberalise agricultural

trade, inter alia, was launched in Doha in 2001, these negotiations are bogged down and are

not likely to result in an agreement to further liberalise market access in the near future.

Instead, the EU has sought to open additional market access through bilateral free

trade agreements with countries willing to go further in liberalising trade. Notable

FTAs recently concluded include those with Korea, Vietnam, Singapore and Canada, while FTAs

are under negotiation with the US, Mercosur, Japan and India and are scheduled to start with

Australia and New Zealand. Trade agreements only open up market opportunities, these must

155 Summary Record of the 1530th meeting of the Special Committee on Agriculture (SCA) held in Brussels on 20th

June 2016. 156 Calculated from Eurostat, Input-output tables at current prices, 60 branches, EU aggregates, domain

[naio_17_agg_60_r2].

http://data.consilium.europa.eu/doc/document/ST-10590-2016-INIT/en/pdf

http://data.consilium.europa.eu/doc/document/ST-10590-2016-INIT/en/pdf


192

then be realised by the relevant business actors. Assistance can be provided, and

Commissioner Hogan has scheduled a number of promotion visits to third countries where

important opportunities exist for EU agriculture and to help open doors for new exports.

In many markets, the major barrier to access is not the level of tariffs imposed but non-tariff

barriers and, in the case of agricultural and food products, particularly SPS measures. The

Commission (DG SANTE, DG AGRI, DG TRADE) has been working for some time to resolve a

number of SPS issues with third country partners, with some success. More focus could be

brought to this work by drawing up an annual priority list of the trade barriers that

the EU hopes to remove.

While these efforts should continue, the negotiation of trade agreements and the removal of

SPS barriers are lengthy and arduous processes and so these are not a relevant response to

the immediate problems likely to be caused by a ‘hard’ Brexit.

4.5. TRQs for UK-EU27 trade

It was argued in Chapter 2 that splitting the EU TRQs between the UK and the EU27 would

mean that the UK TRQs would make no specific provision for existing UK-EU27 trade, and vice

versa. While this might not have any practical implications if the UK and the EU27 create a

bilateral free trade agreement covering agricultural products on Brexit Day, this omission has

significant implications for EU producers if tariff barriers are erected.

In the case of beef TRQs, for example, virtually all EU TRQ amounts are allocated to specific

countries with the small exception of a 1,500t TRQ for frozen edible offal of which 700t is

allocated to Argentina and the remaining 800t is available to other countries. There is a

pigmeat TRQ of 10,159t with a reduced rate of duty of which 4,624t are allocated to Canada

but the EU27 could compete with other countries for the remaining erga omnes quota of

5,535t. Other pigmeat TRQs remain open to any exporter. In the case of the major sheepmeat

TRQ of 283,715t, almost all of this is allocated to specific countries (with New Zealand being

the largest beneficiary with a quota of 227,854t), leaving only an MFN quota of 200t for which

all EU27 exporters would have to compete after a ‘hard’ Brexit. New Zealand also has a butter

TRQ of 74,693t with a very favourable in-quota tariff, while the EU27 would have to compete

for the MFN quota of 11,360t with a higher in-quota tariff in the event of a ‘hard’ Brexit. Two

Cheddar cheese quotas allocate 14,711t TRQs to Australia, New Zealand and Canada while

the EU27 would have to compete with all other countries for a share of the MFN TRQ of

15,005t.

Various EU27 countries have been traditional exporters to the UK market for decades if not

longer. When schedules of concessions were being drawn up at the formation of the WTO in

1994, there was no need to create current access TRQs for these exports because, at that

time, they had completely unrestricted access to the UK market under EU rules. It would seem

odd that the UK would now seek to introduce TRQs in its own schedule of concessions at the

WTO to maintain the market access of what were previously third countries, but not to provide

TRQs to maintain the access of existing exporters that happen to be now EU27 members. Of

course, the UK could make the same argument for EU TRQs for its current exports but, given

the balance of agricultural trade between the two parties, an exchange of TRQ concessions of

this kind should be welcomed by EU producers.


193

Is there a case for pursuing such an exchange of TRQ concessions? This is a matter for legal

scholars to determine, and the answer may not be straightforward (Downes, 2017 reviews

some of the arguments). In principle, the established practice under GATT Article XIII, which

deals with quantitative restrictions, is to extrapolate quota shares from a representative period

(typically three years) of import data. The relevant requirement in Article XIII(2) is to ensure,

in applying import restrictions to any product, that WTO Members “shall aim at a distribution

of trade in such product approaching as closely as possible the shares which the various

contracting parties might be expected to obtain in the absence of such restrictions”.

As Downes explains, basing new TRQs on existing levels of trade might not be deemed to

comply with this requirement given that exports from non-EU exporters were restricted by

TRQs while EU suppliers had preferential access.

Representing countries with substantial supplying interests within the meaning of Article XIII,

the EU27 has the right to make its claims heard when the UK is determining the size and

allocation of its agricultural TRQs. Of course, this right cannot be enforced at the expense of

the holders of existing TRQ quotas. It would be up to the UK, in consultation with other WTO

Members, to reconcile the EU demands as substantial suppliers with those of other third

countries (Downes, 2017). The political acceptability to other WTO Members of allowing EU27

access to the UK would probably be dependent on any TRQ access offer by the EU27. While

the balance of advantages to the EU27 would need to be further explored, the

current bilateral negotiations in Geneva to merely ‘split’ the EU TRQs do not go far

enough to protect the interests of EU producers to access the UK market in the event

of a ‘hard’ Brexit.


194


195

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Consortium.

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with the United Kingdom of Great Britain and Northern Ireland Setting out the

Arrangements for Its Withdrawal from the European Union’, Annex to the Council

Decision Authorising the Opening of Negotiations with the United Kingdom of Great

Britain and Northern Ireland for an Agreement Setting out the Arrangements for Its

Withdrawal from the European Union”, Brussels.

DG AGRI. 2017. Annual Activity Report 2016. Brussels: European Commission.

DG TRADE. 2010. Trade, Growth and World Affairs. Trade Policy as a Core Component

of the EU’s 2020 Strategy. COM(2010)612. Brussels: European Commission.

———. 2013. EU-Ukraine Deep and Comprehensive Free Trade Area. Brussels:

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Downes, C. 2017. “The Post-Brexit Management of EU Agricultural Tariff Rate Quotas”,

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874371.

Duff, A. 2016. After Brexit: Learning to Be Good Neighbours. Commentary 18

November 2016. Brussels: European Policy Centre.

Emerson, M. 2017. Stocktaking after Theresa May’s Brexit Speech in Florence: Key

Point – the Transition, Key Omission – the Future Relationship. CEPS Policy Insights

No. 2017-34. Brussels: Centre for European Policy Studies.

Emerson, M., and V. Movchan. 2016. Deepening EU-Ukrainian Relations: What, Why

and How? London: Rowman & Littlefield International, Ltd.

European Parliament. 2017. Resolution of 5 April 2017 on Negotiations with the United

Kingdom Following Its Notification That It Intends to Withdraw from the European

Union. (2017/2593(RSP)). Brussels.

Frantziou, E., and A. Łazowski. 2017. “Brexit Transitional Period: The Solution Is Article

50.” Brussels: Centre for European Policy Studies.

Grainger, A. 2017. “The Role of Border Management in Implementing Trade Policy

Goals.” In Workshop - Facilitating External Trade via Border Management, by A.

Grainger and J. Hintsa. Brussels: European Parliament Policy Department, Directorate-

General for External Policies.

HM Department of International Trade. 2017. Preparing for Our Future UK Trade Policy.

London: Her Majesty’s Stationery Office.

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and Excise Regimes. Cm 9502. London: Her Majesty’s Stationery Office.

———. 2017b. Future Customs Arrangements: A Future Partnership Paper. London.

———. 2017c. Northern Ireland and Ireland: Position Paper. London.

———. 2017d. The United Kingdom’s Exit from and New Partnership with the European

Union White Paper. Cm 9417. London: Her Majesty’s Stationery Office.

HM Treasury. 2017. Customs Bill: Legislating for the UK’s Future Customs, VAT and

Excise Regimes. Cm 9502. London: Her Majesty’s Stationery Office.

House of Commons International Trade Committee. 2017. UK Trade Options beyond

2019. First Report of Session 2016–17. London: House of Commons.

https://publications.parliament.uk/pa/cm201617/cmselect/cmintrade/817/817.pdf.

IFA. 2016. Brexit: The Imperatives for Irish Farmers & the Agri-Food Sector. Dublin:

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Kouroutakis, A. 2017. “Legal Uncertainty Surrounding the Approval of the Brexit

Agreement.” I-CONect, Blog of the International Journal of Constitutional Law and

ConstitutionMaking.Org. June 28. http://www.iconnectblog.com/2017/06/legal-

uncertainty-surrounding-the-approval-of-the-brexit-agreement/.

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is at Stake in the TTIP?” April 14-15, 2015, Parma, Italy.

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for-exiting-the-eu-pm-speech.

———. 2017b. “Prime Minister’s Letter to Donald Tusk Triggering Article 50,” March 29.

https://www.gov.uk/government/publications/prime-ministers-letter-to-donald-tusk-

triggering-article-50.

———. 2017c. “Florence Speech: A New Era of Cooperation and Partnership between

the UK and the EU.” Florence, September 22.

https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-

cooperation-and-partnership-between-the-uk-and-the-eu.

Meaney, A. 2017. “Brexit: The Implications for Ports.” www.oxera.com.

National Audit Office. 2017. The Customs Declaration Service. Report by the

Comptroller and Auditor General. London: National Audit Office.

Owen , J., M. Shepheard, and A. Stojanovic. 2017. Implementing Brexit: Customs.

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Sobrino Heredia, J M, 2017, Research for PECH Committee – Common Fisheries Policy

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ANNEX 1. EXAMPLES OF CUSTOMS CLEARANCE COSTS

Many of the published examples of customs clearance costs refer to clearing sea containers at

ports. This is the normal way for food products to arrive from non-EU countries into the EU.

Food transport between the UK and the EU27 is more likely to take the form of roll on – roll

off (RoRo) traffic, and the figures quoted below should be taken as illustrative of the costs

that might be incurred.

Customs clearance and inspection costs as well as health checks are normally on a per

consignment basis and thus do not vary according to the value of the consignment. They have

the same effect as a specific tariff in that they bear more heavily on low-value produce than

on high-value produce. This should be borne in mind when comparing cost estimates

expressed as a percentage of the value of trade. The UK House of Lords Select Committee on

the European Union collected evidence on the costs of administering tariff and non-tariff

barriers.85F

157 The Agricultural and Horticultural Development Board estimated that the

transactional costs for customs and health checks between the UK and the EU27 would be “in

the region of 8% to 10%, and perhaps a bit more than that.” The Food and Drink Federation

estimated these costs at “a further eight per cent”, and added that the increase in transactional

costs for ‘composite products’ was “likely to be higher”.

Evidence from an Irish firm of chartered accountants specialising in customs issues was that

the cost for customs clearance, either in the payment of a clearance agent or the recruitment

of staff in addition to logistics related costs, would be €100 per movement. 86F

158

Article 13d of the Plant Health Directive requires Member States to charge for the import

inspections required by the Directive. As an example, in the UK three separate fees are paid

for each consignment. A document check fee (to cover the cost of checking the consignment’s

paperwork) amounts to £5.71 (€6.37). An identity check fee to cover the cost of the inspectors

checking the assignment, also amounts to £5.71 (€6.37) for small consignments (the size of

a truck or railway wagon) or £11.42 (€12.74) if bigger. A physical inspection fee must also be

paid which depends on the type of plant material being imported. Where risk targeted checks

have been set for trade in a particular commodity from a particular country, on the basis of

the compliance record of that trade, a reduced fee is charged. If the consignment arrives

outside normal working hours, a higher fee can be charged. 87 F

159

As another example, Keurpunkt is an approved inspection site for imported fruits and

vegetables at the Port of Antwerp. On its website, it offers administrative and document

assistance at a cost of €35/container, physical inspection of potatoes, fruits and vegetables at

a cost of €37.50/container plus additional contract costs, and phytosanitary inspection of wood

packaging material at €65/container.88F

160

Grainger (2017) quotes costs in the range of a few pounds to £25 (€28) to £50 (€56) for

declaring a sea container; costs can be significantly greater, if further compliance related

services are needed. Other direct costs can include inspection fees, demurrage, storage

charges, handling charges, laboratory fees, amongst others. He quotes from a previous study

157 House of Lords Select Committee on the European Union, “Chapter 6: Costs of administering tariff and non-tariff

barriers”, Brexit: Trade in Goods, HL Paper 129, London. 158 Lynch, C. Partner in BDO Customs and Trade Practice, Evidence to the Oireacthas Joint Committee on Finance,

Public Expenditure and Reform, and Taoiseach inquiry into Brexit: Matters relating to Customs, Trade and Tariffs,

25 May 2017. 159 Details of the current UK rules for importing plants and plant products from outside the EU are given on the

DEFRA web site. 160 https://www.keurpunt.be/en/.

https://publications.parliament.uk/pa/ld201617/ldselect/ldeucom/129/12909.htm

https://publications.parliament.uk/pa/ld201617/ldselect/ldeucom/129/12909.htm

http://www.oireachtas.ie/parliament/media/committees/finance/2017/BDO-Customs-Presentation-Carol-Lynch-25-May-2017.pdf

http://www.oireachtas.ie/parliament/media/committees/finance/2017/BDO-Customs-Presentation-Carol-Lynch-25-May-2017.pdf

https://www.gov.uk/guidance/importing-plants-fruit-vegetables-or-plant-material-to-the-uk


198

he authored which examined the direct compliance costs incurred by businesses when

importing meat from non-EU countries into the UK. The costs of mandatory port health controls

ranged between £382 (€450) and £673 (€793) per container. He notes there are also indirect

costs of customs clearance. These tend to be less tangible, but may be much more significant

than the direct costs. They include missed business opportunities and failure to take advantage

of international trade opportunities, loss of business competitiveness, failure to meet

contractual obligations because of delays at ports and borders, and safeguard measures –

such as by holding additional stock in warehouses and factories to help buffer against

unforeseen delays at ports and borders.

There will also be cash flow implications arising from changes in VAT legislation. At present,

EU importers moving products into the EU from the UK are exempt from having to make

upfront payments of import VAT on their goods. This does not apply to goods outside the EU

customs area. EU importers must pay import VAT upfront, for example, on goods coming from

Turkey, even though it has a customs union relationship with the EU. Although these payments

are eventually recoverable, the introduction of import VAT on all goods being imported from

the UK could represent a major cash flow burden for importers (BRC, 2017). Importers of EU

products into the UK would face a similar burden assuming the UK continues to apply EU rules

after Brexit.


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