The U.S. and other international trade heavyweights have dashed Prime Minister Theresa May’s hopes of a smooth Brexit by rejecting one of her core plans for reintegrating into global trade networks.
Washington’s slap-down of Britain is the second big trade reality check for May in less than a fortnight. Only last week, the U.K.’s increasingly fragile position in trade disputes was exposed by the country’s inability to prevent new, ultra-high tariffs from the U.S. that could hit thousands of jobs in a plane factory in Northern Ireland.
In a fast-developing second trade spat, Washington has teamed up with Brazil, Argentina, Canada, New Zealand, Uruguay and Thailand to reject Britain’s proposed import arrangements for crucial agricultural goods such as meat, sugar and grains after Brexit. The fact that the U.K.’s opponents include the U.S., Canada and New Zealand is a significant setback because Britain is trying to style its former colonies as natural strategic and commercial allies after it has quit the EU.
Since August, Britain and the EU have repeatedly insisted that they had reached an agreement on the terms under which Britain would buy in food from around the world after Brexit.
The argument from Britain and the EU is that the rest of the world will be “no worse off” after Brexit if the EU’s quotas are simply reduced, and Britain takes a share of them.
Brussels currently negotiates all these quotas and tariffs on behalf of Britain and the 27 other EU countries jointly, but London will need to take independent control of these policies from March 2019. That creates a dilemma over how to divide up the EU’s current quota arrangements with other countries — agreed at the World Trade Organization — between the U.K. and the remaining 27. These tariff-rate quotas allow countries outside the EU to export certain goods into the bloc with reduced duties, but only up to a maximum limit.
The argument from Britain and the EU is that the rest of the world will be “no worse off” after Brexit — a key legal defense in trade disputes — if the EU’s quotas are simply reduced, and Britain takes a share of them. British Trade Minister Liam Fox told POLITICO in an interview that Britain had agreed to take a portion of the EU’s quotas based on the U.K.’s average consumption over the last three years.
America and the six other big food exporters, however, wrote an unusually sharply worded letter of complaint dated September 26 to the U.K. and EU representatives at the World Trade Organization over the terms of such an arrangement.
“We cannot accept such an agreement,” reads the letter, seen by POLITICO. The seven countries dispute the legal defense that the proposed post-Brexit arrangement would leave them “no worse off.”
The countries were particularly aggrieved that they had not been consulted and stressed that no calculation of Britain’s tariff-rate quotas could be agreed at the WTO “without our agreement.”
Indeed, the countries suggested Britain and the EU might need to rework the whole system of import tariffs and could not just shuffle quotas between each other, without disturbing “the delicate balance of concessions and entitlements that is fundamental to the global trade architecture today.”
“The modification of these tariff rate quota access arrangements cannot credibly be achieved through a technical rectification. None of these arrangements should be modified without our agreement.”
The big food exporters argue that two fixed quotas — a U.K. quota and an EU27 quota — make markets less easy to sell to than one big quota.
The logic is this: if the EU quota for, say, lamb is 100,000 tons, the exporters say they lose out if that is divided into 30,000 tons for the U.K. and 70,000 tons for the EU27. If British lamb consumption plunges and the quota is unfilled, the exporter cannot necessarily compensate by selling more of the meat to France or other EU markets. The original 100,000-ton lamb quota allowed the exporter more flexibility in where it could sell in case one market buys less.
“Don’t imagine it is just little ole New Zealand with concerns.”
“We don’t know the exact economic consequences of Brexit,” said a Brazilian trade diplomat at the WTO, alluding to a potential economic decline in the U.K. post Brexit as well as new trade deals that could alter the appetite for New Zealand’s lamb exports. “If we split the quotas, we risk having less market available for our exporters.”
A spokesperson for Britain’s trade department promised to coordinate with the complainants: “The U.K. wants to ensure a smooth transition which minimizes the disruption to our trading relationships with other WTO members and tariff rate quotas are one of the issues that we are discussing with the EU, and with WTO members.”
The exporters are likely to seek to redress the balance by pushing for bigger export quotas, something that will trigger concern among both British and EU farmers because it will mean potentially more exported goods competing on the market with their own production.
New Zealand’s Deputy Trade Secretary Vangelis Vitalis took to Twitter to protest that Britain and the EU were effectively delivering a fait accompli to the WTO.
“Sorry that key partners assume a deal they strike between them will suit the rest of the world,” he wrote.
He also warned that bigger players than New Zealand, itself a massive dairy, fruit and lamb powerhouse, would exert pressure at the WTO: “Don’t imagine it is just little ole New Zealand with concerns.”
As if to drive home that point, a spokesperson for the U.S. Trade Representative said: “Ensuring that U.S. exporters of food and agricultural products have the market access in Europe due to them even after Brexit is a high priority for the administration.”