World Trade Organization Rules Affect Price Not Conformity
During the process of Brexit, we hear a lot about World Trade Organisation Rules, or WTO Rules. The idea is that if the UK leaves the EU without a deal, the UK will only have these WTO rules to fall back on.
While WTO rules should ensure the UK can trade without excessive tariffs based on a most favoured nation basis, it does not address the requirement of goods to undergo a conformity assessment when entering the EU.
Without a mutual recognition agreement (MRA) in place between the EU and the UK, containers of UK goods entering the EU would have to be inspected. This can involve a sample of goods being sent to an approved testing facility before the container is released. As well as a cost of several hundred pounds, the process can result in the shipment being delayed for up to ten days.
In practice, only around 5% of containers are inspected. Since all UK exports would become subject to these checks, this randomly occurring delay would really mess up the just-in-time supply chain that many UK manufacturers rely on to keep prices down through efficiency. The UK would similarly be expected to inspect goods arriving from the EU.
For many businesses the desire is for the UK to remain within the European Free Trade Association (EFTA). This means our trade with the EU would be covered by existing MRAs. This includes the 27 EU members states plus the 3 EFTA status countries: Norway, Iceland and Liechtenstein. However EFTA membership comes with free movement of EU workers so is politically unacceptable according to the “Brexit means Brexit” mantra.
A Mutual Recognition Agreement for UK – EU Trade
Fortunately ETFA membership is not required to establish and operate MRAs, protocol 12 allows for the third countries to operate free trade with conformity assessment provided via mutual recognition agreements. This is what Australia, New Zealand, Canada, Switzerland and the USA have done for certain market sectors. Therefore the option is for the UK to negotiate an MRA with the EU which would become known as the EEA EFTA – UK (based on Protocol 12).
Time To Start Trade Talks Is Now
Mutual Recognition Agreements will probably become the focus of UK trade negotiators if and when there is some progress on the Brexit bill.
Australia took around 10 years to negotiate its MRA with the EU. The UK should take far less time since UK trade is already compliant with the rules having been a member of the EU. The only delay in concluding an agreement would surely be for political rather than for technical or practical reasons.
But it won’t be plain sailing as the recent agreement between the EU and UK on the sharing of WTO quotas, demonstrated.
Global Producers Unhappy With WTO Quota Deal Breakthrough
At the beginning of October 2017, the UK and the EU reached an understanding on sharing the quotas that govern the import of farming produce into the EU.
An example of this would be where a third country, such as New Zealand, has an agreement to sell say 140,000 tonnes of lamb to the EU. Since the UK currently takes around 50% of the lamb supplied, the quota would be split 50/50 with a post Brexit agreement being 70,000 tonnes to the UK and 70,000 tonnes to the EU.
The UK view is that suppliers are no worse off under the new arrangement and hence the existing deal can continue but with a split quota.
Other countries with similar quota related deals such as the USA, Canada, Brazil, Argentina, Uruguay and Thailand wrote to the WTO asking it to reject Britain’s proposed post-Brexit import arrangements for agricultural goods such as meat, sugar and grains.
Their issue is that two fixed separate quotas, a UK quota and an EU quota, are worth less to them than one combined quota. If the UK (or EU) goes into recession and requires less than a quota suggests, they cannot make up the difference by selling more than the allowed quota to the other party. As a result they want to renegotiate the terms of the deal. This could take months or years if every deal has to be reviewed and renegotiated.
A No Deal Brexit Decision Cannot Wait Until 2019
While the Brexit negotiating team believe the best deal for the UK will be available at the 11th hour of the negotiation i.e March 2019, many businesses cannot expose themselves to the risk of a “no deal” scenario. The risk will force them to execute their contingency plans in 2018 should a “no deal” outcome is a real possibility.
This is why the MRA for UK-EU trade must to be signed and sealed in the first half of 2018. If not, companies will start to modify their supply chains. This would inevitably increase their costs and hence increase prices for consumers. In some cases it might even involve the closure of operations in the UK with relocation to Europe. This is a level of disruption that would damage UK business in the short to medium term.
Therefore if the UK is to make a success of Brexit from a trade perspective, the exit bill, the Northern Ireland border and citizen’s right require an early resolution in 2018 in order for the UK to start the process of securing its future trading relationship with the EU.