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11 Jun, 2018

Brexit Uncertainty Continues – Tariff Implications Explained

Since June 2016 when the UK voted in favour of leaving the European Union (EU) the potential impacts of Brexit have been widely discussed and debated. Two years since the referendum the large number of potential risks are still evident while the unknowns remain unclear.

Since June 2016, when the UK voted in favour of leaving the European Union (EU), the potential impacts of Brexit have been widely discussed and debated. Two years since the referendum the large number of potential risks are still evident while the unknowns remain unclear. The UK triggered the release clause of the EU under Article 50 on 29 March 2017 which means that the UK will formally leave the EU on 29 March 2019. As 35% of Irish food and drink exports go to the UK this means Ireland’s largest indigenous sector is one of the most exposed to the potential impacts of Brexit.

Trade policy has been widely reported as a key negotiation issue however there has been no agreement yet and this leaves a limited amount of time to form an agreement before the UK formally leaves the EU. This is of particular importance at present due to the current volatile geopolitical climate which is leading to the implementation of tariffs on key global commodities. Presently, Ireland enjoys tariff free access to the UK market under current EU trade policy however from a customs perspective any country that is not a member of the EU is a third country and if no trade agreement is in place with that country it is therefore subject to WTO trade rules with tariffs being incurred. So what exactly are tariffs and how do they work?

Tariffs

Tariffs are essentially taxes or duties applied to imports and exports between trading nations. There are three main tariff scenarios under WTO rules; most favoured nation (MFN) tariffs which is most commonly used, preferential tariffs and bound MFN tariffs. Agri food and drink products are generally bound by an ad valorem basis i.e. percentage of value or on a weight specific basis and often a combination of both these methods with additional duties per ingredient (e.g. fat content of dairy preparations).

Tariff Codes

All products traded are coded and these are defined under a harmonized system as agreed by the WTO. Each product category is identified by a two digit chapter and further sub divisions are defined by adding extra digits e.g. “02” is meat and edible meat offal while “0201” is fresh or chilled beef and “020130” is fresh or chilled boneless beef. Any changes to these product codes are administered by the WTO. Agri food products are currently among the products with the highest tariff rates and assuming an absence of a trade agreement between the UK and the EU here are some examples of the potential impact of tariffs in a WTO MFN scenario.

  • Beef

Over 50% of Irish beef is exported to the UK and the introduction of tariffs will greatly increase costs and impact competitiveness. Looking at average tariffs for beef their application is likely to add an additional cost of around 70% to Irish product. For example fresh or chilled boneless beef, which is one of the main beef products exported, is currently bound under WTO rules by an ad valorem and weight based tariff of 12.8% plus €3,034 per tonne.

  • Dairy

Almost 25% of Irish dairy products are exported to the UK with cheese and butter the key categories driving this. Over 50% of cheese exports are destined for the UK with Ireland the main supplier of cheddar cheese imports to the country. Tariffs on cheese in a WTO scenario currently range between €1,391 per tonne and €2,212 per tonne, with the tariff for cheddar cheese currently €1,671 per tonne, and are based on weight and product specification. In addition almost 25% of Irish butter exports are to the UK market and similar to cheese tariff rates under a WTO scenario are applied on a weight basis. Tariffs on most butter imports are €1,896 per tonne with additional duties for spreads. The existence of such costs would severely impact price competitiveness.

  • Live Animals

Although down on historic levels, the UK remains an important market for live cattle. Currently WTO tariffs for third country markets are around 10.2% of the value plus a weight charge of €93.1 per 100 kg. In such a scenario the impact on the live cattle trade would be considerably negative with increased price pressure.

  • Agricultural Machinery

Exports of Irish agricultural machinery are worth in excess of €100 million per year and the UK is a very important market for manufacturers. At present WTO tariffs from third countries are significantly lower than food tariffs with most agricultural machinery bound by tariffs of between 0% and 1.7% ad valorem.

Next phase

Later this month at an EU summit leaders will review progress to date and provide the framework for formal trade negotiations with the UK. In late autumn it is hoped to have an agreement on a withdrawal treaty in place with the view of this being ratified by the European Parliament and the UK parliament in early 2019. The UK will formally leave the EU at midnight on 29 March 2019 but should there be no trade agreements in place at this time they will enter a transition period where it effectively still holds the same benefits of EU membership for a further two years offering a further grace period albeit prolonging the uncertainty.

With the threat of tariffs and trade disruption now is the time to start assessing options to overcome such barriers. It is very important to identify the correct tariff rates for each product to measure the additional costs involved. On top of this there is also the potential to focus on product specification where applicable and realign product constituents to the avail of the most cost effective tariff. For example drinks manufacturers have reduced sugar content of products to reduce the new sugar tax here which came into effect in May.

In the meantime the risks of Brexit remain as strong as ever with uncertainty impacting the market. Therefore with the formal exit deadline looming it is necessary for agri food businesses to focus on Brexit when putting future plans in place.