Oranges and lemons – and bananas
“Oranges, lemons and bananas” is not an oblique reference to the politicians who put us where we are today. Definitely not….Andy Pye looks at some fruity trade deals.
Perhaps when life gives you lemons, the only thing to do is to make lemonade. The day after the Referendum, Dr Holger Schmieding, Chief Economist, Berenberg said to me that both the UK and the EU will lose from the Brexit decision. It’s just simply that the cost of exiting the EU will cost the UK more than it can gain by forming new trade deals with other partners. And the EU will suffer because it is a smaller, less secure economic bloc than hitherto. So everybody loses, but the UK will lose the most.
Remainers (aka Remoaners or Snowflakes) felt like doing anything but making lemonade. This has nothing to do with revenge or vindictiveness.
The figures which bear that out – and which (for reasons which only those running our democracy can tell us) were kept well away from the Referendum and the Parliamentary debate which has just confirmed the outcome of the Referendum – are unequivocal about that. We have just taken a momentous economic decision which may shape our country for decades to come, without a single costed proposal. In a world of alternative facts, this is the most amazing fact of all. The people and their parliamentary representatives alike have made a decision without a clue what the implications may be. It will come back to haunt them all, and it proves that neither the people nor the current electoral system are up to the task.
And they take no account of extraneous factors such as the breakup of the United Kingdom, the movement of major third country investment in search of partners within the EU and the rise of race hate and xenophobia discouraging much-needed immigrant labour.
And perhaps one extraneous factor which is often overlooked – that of goodwill: we have been partners with European companies – buyers of our products and services – for 40 years. We do £230 billion of trade with them. If a European buyer now has a choice between buying British and buying from a supplier within the EU, which is he likely to choose? Perhaps the buyer has a relative in the UK who is unsure of his or her future security; perhaps there will be a tariff on the British product. Perhaps British replacement parts are in danger of being held up at a British port while the buyer’s production line in at a standstill. So the cost of goodwill will be at least as large as the immediate financial cost.
Yes, it is true that we import more than we export from the EU, but if we didn’t import those things from the EU we would import them from somewhere else. We don’t make much automation equipment (gears, drives, motors, that sort of thing). And we can’t make much of our own wine, and we can’t grow oranges, for example.
So while on the subject of oranges, while we may not be able to make much lemonade, how about orangeade?
Well, oranges are an interesting example of a trade deal. It is often said that countries can trade without a trade deal. That’s true and we do. We already do exactly that. The purpose of a trade deal is not just to remove tariff barriers, but to ensure that neither party is damaged by the removal of trade barriers. For example, if we had an open agreement with New Zealand, our market might be flooded with New Zealand lamb and Welsh sheep farmers might lose out. So it might be in our interest to keep a tariff on New Zealand lamb (unless of course, we do not care about the future of Welsh sheep farmers). Similarly, New Zealand (like it seems all potential new partners, including the Turks) wants some access to the British labour market – this is a great irony, since voting to keep out the Turks was a cornerstone of the Leave campaign.
So trade deals are complex and take a long time to do well. Of course, they don’t take much time to do badly, but if we go down that route, we will get the bad end of any deal. Mr (“America First”) Trump is very keen to do a quick trade deal with the UK – of course the quicker he can secure US interests at the heart of it, while the UK is desperate to show results, the more we will lose out in the long term.
It’s a common assumption that the UK can easily adopt the EU’s customs duties as its own after Brexit. For most of the thousands of traded products it’s likely to be true, both for the actual duties charged and for the commitments the UK will re-establish in the World Trade Organization (WTO).
But with many other products the UK might find that simply carrying on with the EU’s duty rates is not so easy. One example is in agriculture. A lot depends on how other countries react. Oranges are as good an indicator of their possible reactions as any other product. Peter Ungphakorn provided a very good summary of what’s involved in this blog, Oranges: a litmus test of UK post-Brexit tariff negotiations.
In summary, Spain produces more than half of the EU’s oranges. There are three sides to the problem: what the UK itself does, how non-EU countries respond, and how the EU reacts. Each of those will play a part in whether negotiations are settled quickly and easily or get bogged down in friction and ill-will.
Much will also depend on the pressure other countries face from their own internal interest groups. For oranges, that means the growers and exporters in Argentina, Egypt, Israel, Morocco, South Africa, the US and elsewhere, perhaps even China and India, which are also major producers but not yet exporters. We are a long way from finding out how easy or difficult this will turn out to be.
Despite the current EU trade deal on oranges running to 68 pages, all of this could be settled in just a couple of months. Seriously. But only with goodwill, and only if orange tariffs were the only issue to be settled. It will not have escaped the readers’ notice that some of these countries may wish to use oranges as a bargaining chip for other issues, such as territorial disputes. Goodwill cannot be taken for granted – it will quickly evaporate if the UK just decides what it wants to do and presents that to the rest of the world as “take it or leave it”. Familiar words?
An alternative would be for the UK to set much lower import duties (say, 3.2% all year), which would please non-EU exporters and provide UK consumers with cheaper oranges. However, it might cause concern among EU producers particularly if the UK continues to have duty-free access to the EU market for other products and services. So oranges could have wide-reaching repercussions.
For the future, the UK’s relationship with the EU may be based on:
- Full access to the EU single market
- UK still in the EU customs union
- A free trade agreement between the UK and EU
- None of the above
As things currently stand, the latter looks most likely. Then, the UK would have its own tariffs under the WTO, except for any bilateral (or small-group) free trade agreements with non-EU members. Pressure on the UK’s orange tariffs would come both within the WTO and through free trade talks. Importantly, Spain and other EU producers might also negotiate for a lower UK tariff on oranges. There seems to be no reason why the UK would object (unless its apple growers felt threatened by orange imports). What does this mean? At the very least the UK and its trading partners would need to know which of those options was the target before serious negotiations could start on the UK’s orange tariffs and tariff quota (both within the WTO and as part of any bilateral free trade agreement).
Meanwhile when the UK negotiates free trade with Australia, Chile, the US and anyone else, orange tariffs will only be a small part of a much larger task. Along with oranges, the EU has seasonal tariffs on cut flowers, potatoes, tomatoes, cauliflowers and broccoli, lettuce, celeriac, cucumbers, peas, beans, artichokes, avocados, mandarins (including tangerines, satsumas, etc), grapefruit, grapes, apples, pears, apricots, cherries, peaches, plums, strawberries, kiwi fruit, and sub-categories among them.
Many of these are designed to protect specific groups of producers who may or may not be equally spread between the UK and the rest of the EU, raising questions about how much tariff protection the UK and EU need to keep for each of those products. But the UK has no commercial producers, so a key question is whether the UK can defend continuing with the EU’s tariffs after it leaves without being challenged by other countries — or whether it would want to.
Then, still within the WTO, there are the much more difficult negotiations over tariff quotas. And the 13,608 tariffs on biscuits, chocolate and the like. And possibly some discussion of the UK’s services commitments.
And then there are the negotiations with the EU itself, on the UK’s WTO commitments on top of any trading arrangement between the EU and UK after Brexit.
By now the number of person-hours, days, months, years needed is soaring — to consult domestically on that growing list of issues, prepare positions, research data, sort out legalities, coordinate between ministries (just for oranges, it would include the departments of International Trade, Exiting the EU, Environment, Food and Rural Affairs, and the Treasury), and to negotiate with the EU and the rest of the world.
And other countries will also need time and resources. They may not be able to focus on UK orange and avocado tariffs and to consult their producers and exporters, while they deal with other on-going negotiations and a range of other issues including elections. On top of that, the EU also has to coordinate everything with its member states.
Suddenly two months has become a blink of an eye. Hopefully we can all have faith in the ability of Boris Johnson and his colleagues to manage all of this in the minimum time needed.
Which leads us neatly to banana skins. The well-documented lady on Question Time whose vote was cast on the basis of a fictional EU Directive on the curvature of bananas caused great merriment.
In fact, it is the supermarkets who dictate that bananas should be straight, and probably tens of thousands “too bendy” bananas are discarded annually – don’t complain to the EU, complain to Tesco, Asda, Morrisons etc. The reason they do this is because the non-perfect ones don’t sell and they have to bin them. So it’s actually the consumers’ fault – and as far as I know, Leave and Remain voters are equally culpable.
But there is (or strictly was) an EU Directive which specifies quality grading standards for Bananas. It has nothing to do with curvature and affects only growers and importers: it is there to ensure that consumers do not get sub-standard products. This is just the same as most EU regulations that are the source of complaint – to protect the consumer from poor quality of unsafe goods.
The detail is here: Commission Regulation (EC) No. 2257/94.
It was replaced by Commission Implementing Regulation (EU) No 1333/2011 of 19 December 2011, laying down marketing standards for bananas, rules on the verification of compliance with those marketing standards and requirements for notifications in the banana sector with effect as of 9 January 2012.
I doubt anyone has any idea what the UK Government’s plans are to replace this, or will the existing regulations on bananas will simply be integrated into UK law?