Officials from the United Kingdom and the European Union made their first noteworthy agreement on post-Brexit trade last weekend. They confirmed that the parties will split WTO import quotas based on import patterns for respective farm goods. The proposed deal will not cover trade between the UK and EU, which is still deadlocked in Brussels. Rather, it will affect trade between the two and all other WTO members, whose products often face steep tariffs upon entering the EU’s single market. The agreement will still need to be confirmed with the WTO, too.
Directly following the news, major global ag producers from outside of the EU lobbied the WTO to reject any such agreement. Countries such as Argentina, Brazil, Canada, New Zealand, and the US, among other large exporters, argued that such a deal would in fact leave them “...worse off, nor fully honor the existing [WTO] access commitment.” Any division of tariff quotas would be proportional to the EU and the UK’s respective import levels, measured over a three-year period. And these large ag exporters are implicitly arguing that any split will not equal the whole as it is now. The flexibility of exporters dealing with a single quota followed by unfettered access to the EU’s single market will disappear and won’t be replaced by other substantive advantages.
As a continental market, Europe experiences offsetting highs and lows in agricultural performance across a wide geographic area. A big quota calibrated to the historical trade behavior of that market as a whole will clearly outperform any scheme of multiple smaller quotas for different subregions. In a year of a UK bumper crop, the national import quota could go entirely unused. In a crop failure, the quota would be inadequate and impede the UK’s needed supplies. To a limited extent, the same argument applies to the remainder of the EU, but it probably has enough geographic range to avoid wide production swings.
If the UK were a smaller market by value, none of these complications would be internationally newsworthy. As a large, developed country with a significant trade deficit, however, the UK’s market is serious business for global food and ag exporters. Using wheat as an example, it is clear to see why large ag exporters object to the proposed deal. Currently, the EU can import up to 300,000 tonnes of quality wheat with little to no duties charged. These 300,000 tonnes will become 27,000 tonnes of wheat imports duty-free to the UK and the remaining 273,000 tonnes to the EU, according to the outline of the agreement.
Yet this simple arithmetic split glosses over the volatility of European markets and obfuscates the loss of flexibility for exporters. A large producer of wheat itself, the UK’s share of EU imports, often changes rapidly. The past three years have been relatively stable for producers, but 2013 saw UK imports nearly double over the previous year.
Large, non-EU ag producers will also lose flexibility to re-export. The size and proximity of Rotterdam’s port, for example, allows global exporters to ship in bulk to the Netherlands, after which goods are then quickly and efficiently re-exported across the continent and the North Sea. The UK has historically imported the majority of its chicken meat and tomatoes, to name a few, from the Netherlands. Exporting far more tomatoes than it produces and consumes, the Netherlands often functions as a distribution center for the single market, especially for countries nearby such as the UK. This benefit will also be lost post-Brexit, and the proposed deal offers no alternative solutions.
If quotas are divided based on only three previous years of import volumes, both British consumers and the exporters looking to feed them will be subject to steep tariffs during periods of stress. Additionally, new quotas would not reflect true UK demand, and could result in a lost opportunity for export countries. Ultimately, concerns from other large ag producers and WTO members will likely force import quotas above the values from a simple split, leaving everyone with a feeling of compromise on a deal that no one wanted in the first place.