Short-term Brexit effects on Cape exports

In the UK, Prime Minister Theresa May will put three separate Brexit-related votes to the British Parliament this week. On 12 March, today, British MPs will take part in a second “meaningful vote”, voting on a revised withdrawal deal with the EU.

If it passes, and is approved by the European Parliament, then the UK will leave the European Union (EU) with a deal in place. The withdrawal deal has only been revised from the deal voted on earlier this year insofar as it relates to the border between the Republic of Ireland and Northern Ireland (the Irish backstop).

In the event that the withdrawal deal is rejected again, MPs will then vote on 13 March on whether the UK should leave the EU without a deal. This option seems likely to be rejected by Parliament.

In the event that the first two options are rejected, then on 14 March MPs will have the opportunity to vote on whether the government ought to seek a delay of the 29 March Brexit deadline. This week will therefore provide an outcome, in one way or another, to the current impasse and possibly an extended deadline.

Meanwhile in South Africa:

Meanwhile in South Africa, Parliament may also be called upon this week to ratify a new trade agreement between the UK and the Southern African Customs Union plus Mozambique (SACU+M). The governments of the SACU+M countries have been negotiating an agreement with the UK to ensure trade continuity upon the UK’s exit from the EU. This agreement will largely be a replication of our Economic Partnership Agreement (EPA) with the EU.

As part of the EU customs union, the UK has been a party to all EU trade agreements, and therefore the trade of goods between South Africa and the UK has until now taken place under the conditions set in the EU–SACU+M Economic Partnership Agreement (EU EPA). The EU EPA, which came into force in 2016, provides duty free and preferential access for a large amount of Southern African goods into the EU market, and thus also into the UK market. Once the UK leaves the EU, it will no longer be a party to the trade agreements that the EU has with other countries. Therefore, once the UK leaves the EU, South African goods will no longer have duty free or preferential access into the UK market unless a new and separate agreement is entered into between the two countries.

Various Scenarios:

Depending on what happens this week in the British Parliament, there are various scenarios that could occur. How this plays out will have an impact on South African goods being exported to the UK.

The first scenario is that the UK leaves with a withdrawal deal in place with the EU.

This will happen if Parliament votes in favour of the Prime Minister’s deal. It is likely in this case that the deadline of 29 March could be extended for a short while to ensure technicalities are in place. If the UK does leave with a withdrawal deal, there will be an orderly transition period, likely 2 years, and during this time, the UK will remain a part of the EU customs union. During this transition period, the UK will negotiate its future trade relationship with the EU. Should this be the case, South Africa (and all other third party countries) will continue to trade with the UK as if it were part of the EU for another two years. In this case the SACU+M – UK Agreement will not come into force immediately after 29 March, but rather will kick in after the transition period, once, and if, the UK leaves the EU customs union.

The second scenario is a no-deal Brexit.

If this happens, then as of 29 March the UK will no longer be a member of the EU customs union and there will be no transitional withdrawal agreement in place. In this case, trade between the EU and UK will happen in accordance with World Trade Organisation (WTO) rules. This will result in major and widespread disruptions in the short-term. Customs checks will have to be introduced for goods crossing the border, and regulatory standards will for instance no longer be automatically accepted between the EU and UK.

In the case of a no-deal Brexit on 29 March, the UK would also have to trade on WTO principles with all the countries with which it has not concluded a bilateral preferential trade continuity agreement by that day. WTO principles include the Most-Favoured-Nation (MFN) rule, which says that a country has to extend the same tariff rate to all WTO members alike. There are, however, certain exceptions to the MFN rule, such as having entered into a trade agreement with a country, or unilaterally providing preferential market access to developing countries (e.g. GSP and AGOA).

Under a no-deal Brexit, there are two scenarios for South Africa: Roll-over Agreement with the UK or no Roll-over Agreement.

Should the SACU+M –UK Agreement be in place in time for the 29 March deadline (i.e. signed and ratified), then South African goods are assured of having preferential access to the UK market the day after Brexit if there is a no-deal Brexit. If the agreement is not in place in time, then South African goods will also face MFN tariffs upon entry into the UK market in the case of a no-deal Brexit. The UK is yet to publish its post-Brexit MFN tariff rates.

The third scenario is a delay of the deadline and a return to the drawing board.

This will happen in the event that the Prime Minister’s deal is rejected, that a no-deal Brexit is rejected, and the British Parliament votes for an extension of the 29 March deadline. This will mean extending the uncertainty of what Brexit will look like, and potentially even whether it will happen.

How does a no-deal Brexit play out in the short-term for South African exports to the UK?

There is one scenario, in the short term, where EU goods to the UK could face higher tariffs than South African goods. This would be in the case of no-deal Brexit but a roll-over agreement between South Africa and the UK.

There would however still be major disruptions to many South African exports in this case. A large amount of South African goods destined for the UK are shipped through Rotterdam or other European ports, and these products will get caught up in border disruptions en route to the UK. Similarly, many South African exports destined for mainland Europe are transported through the UK.

What would a no-deal Brexit mean for Western Cape exports to the UK relative to imports of the same products from other countries?

The UK was the Western Cape’s second largest export market in 2017 after Namibia (and South Africa’s 8th largest export market). The UK was also the number one source of foreign direct investment into the Western Cape and the number one source of foreign tourists in 2017. The Western Cape’s economy is therefore closely tied to that of the UK.

The Western Cape’s top exports to the UK in 2017 were:

  1. Fresh grapes
  2. Wine (in containers of 2l or less)
  3. Apples
  4. Mandarins/clementines
  5. Wine (in containers of more than 2l)
  6. Oranges
  7. Cranberries
  8. Plums/sloes
  9. Peaches/nectarines
  10. Skincare/beauty products/sunscreen
  11. Dried fruit
  12. Raspberries/blackberries/mulberries/loganberries
  13. Lemons/limes
  14. Pears
  15. Lychees/tamarinds/passion fruit
  16. Preserved pears
  17. Hake
  18. Rooibos tea[1]
  19. Preserved peaches
  20. Grapefruit

A look at the Western Cape’s top ten exports to the UK relative to the same products from other exporting countries:

  1. Grapes

South Africa was the main source of imported fresh grapes in the UK in 2017; 26 percent of fresh grape imports to the UK were from South Africa.

The next biggest source of imported grapes were Spain (17 percent) and Chile (10 percent).

In the case of a no-deal Brexit, South African grapes will continue to benefit from seasonal preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time. If not, then South African grapes will be subject to MFN duties in the short term in the case of a no-deal Brexit.

The UK already has a roll-over agreement in place with Chile, and therefore Chilean grapes will continue to have market preference after Brexit.

In the case of a no-deal Brexit, in the short-term, Spanish grapes will face MFN tariffs into the UK. If there is a withdrawal deal then Spanish grapes will continue to enter the UK market duty free in the short-term.

Grapes imported into the EU on an MFN basis currently face a 14.4% ad valorem tariff  (proportion of total value) and an entry price condition.

  1. Wine (2l or less)

Wine imports in the UK in 2017 came from France (31 percent), followed by Italy, Spain, New Zealand, Chile, Germany, Australia, Argentina and South Africa (3 percent).

In the short term, Italian, Spanish and German wine will face MFN tariffs in a no-deal Brexit scenario, but will continue to enjoy duty free access if there is a withdrawal deal.

Australia and New Zealand do not have preferential access to the EU market and the UK will therefore not have any agreement in place directly post Brexit. Wine from Australia and New Zealand will thus continue to face MFN tariffs into the UK market.

Argentinian wine will be subject to MFN tariffs.

Chilean wine will have the same preferential access it enjoys under Chile’s trade agreement with the EU based on the roll-over agreement already concluded between the UK and Chile.

South African wine will continue to benefit from preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time; if not, then South African wine will be subject to MFN duties in the case of a no-deal Brexit, in the short term. The SACU+M –UK Agreement will include new tariff rate quotas for wine.

Currently EU (and thus UK) MFN tariffs on wine in containers of 2l or less can be up to 0.32 Euros/litre.

  1. Apples

France was the main source of imported apples in the UK in 2017, accounting for 31 percent. South Africa was second at 18 percent, followed by New Zealand and Chile.

In the case of a no-deal Brexit, in the short-term, French apples will face MFN tariffs into the UK. If there is a withdrawal deal then French apples will continue to enter the UK market duty free in the short-term.

South African apples will continue to benefit from preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time, if not, then South African apples will be subject to MFN duties in the case of a no-deal Brexit, in the short term.

Apples from New Zealand will continue to face MFN tariffs as they currently do.

Chilean apples will have the same preferential access enjoyed under Chile’s trade agreement with the EU based on the roll-over agreement already concluded between the UK and Chile.

Apples imported into the EU on an MFN basis currently face a 7.2% minimum ad valorem or 0.36 Euro /100kg and entry price conditions.

  1. Mandarins

Spain was the biggest source of imported mandarins in the UK in 2017, accounting for 41 percent, followed by South Africa at 23 percent, and then Morocco.

As above, in the short term, Spanish mandarins will either continue to enter the UK market duty free in the case of a withdrawal deal, or face MFN tariffs if there is no-deal.

South African mandarins will continue to benefit from preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time; if not, then South African mandarins will be subject to MFN duties in the case of a no-deal Brexit, in the short term.

Moroccan mandarins will face MFN tariffs entering the UK market in the case of a no-deal Brexit, as the UK has not concluded a trade continuity agreement with Morocco yet.

Mandarin imports to the EU on an MFN basis are subject to entry price conditions.

  1. Wine (Larger than 2l)

The largest source of imported bulk wine in the UK in 2017 was Australia, followed by the USA, New Zealand, and then South Africa (4th at 9 percent).

Neither Australia, the USA nor New Zealand have a trade agreement in force with the EU, and therefore, the UK is unlikely to have any preferential agreements with them in place immediately after Brexit. These wine imports will therefore all continue to be subject to MFN tariffs in the short term.

South African wine will continue to benefit from preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time; if not, then South African wine will be subject to MFN duties in the case of a no-deal Brexit, in the short term. The SACU+M –UK Agreement will include new tariff rate quotas for wine.

Currently EU MFN tariffs on wine in containers of more than 2l can be up to 0.32 Euros/litre.

  1. Oranges

The largest source of imported oranges in the UK in 2017 was Spain (34 percent), then South Africa at 25 percent, followed by Egypt.

In the case of a no-deal Brexit, in the short-term, Spanish oranges will face MFN tariffs into the UK. If there is a withdrawal deal then Spanish oranges will continue to enter the UK market duty free in the short-term.

South African oranges will continue to benefit from preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time (gradual reduction of seasonal tariffs), if not, then South African oranges will be subject to MFN duties in the case of a no-deal Brexit, in the short term.

Egyptian oranges will face MFN tariffs entering the UK market in the case of a no-deal Brexit, as the UK has not concluded a trade continuity agreement with Egypt yet.

Currently MFN tariffs on oranges are seasonal and range between 12 and 16 percent ad valorem. Entry price conditions are applied.

  1. Cranberries

The largest source of imported cranberries/ bilberries  in the UK in 2017 was Spain, with 24 percent of imports, followed by Chile, Peru, and South Africa (11 percent).

In the case of a no-deal Brexit, in the short-term, Spanish cranberries/ bilberries will face MFN tariffs into the UK. If there is a withdrawal deal then Spanish cranberries/bilberries will continue to enter the UK market duty free in the short-term.

Chile will have preferential access into the UK market based on the continuity agreement already concluded with the UK.

Peruvian cranberries / bilberries will face MFN tariffs as Peru has not yet concluded a continuity agreement with the UK.

South African cranberries/bilberries will continue to benefit from preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time, if not, then South African cranberries/ bilberries will be subject to MFN duties in the case of a no-deal Brexit, in the short term.

Currently EU MFN tariffs are 4 percent ad valorem.

  1. Plums and Sloes

South Africa was the biggest source of imported plums and sloes in the UK (34 percent) in 2017, followed by Spain and Italy.

South African plums will continue to benefit from preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time; if not, then South African plums will be subject to MFN duties in the case of a no-deal Brexit, in the short term.

In the case of a no-deal Brexit, in the short-term, Spanish and Italian plums/ sloes will face MFN tariffs into the UK. If there is a withdrawal deal then Spanish and Italian plums/ sloes will continue to enter the UK market duty free in the short-term.

Currently EU MFN tariffs on plums and sloes are 12 percent, with entry price conditions.

  1. Fresh peaches

Spain was the biggest source of imported fresh peaches to the UK in 2017 at 63 percent, followed by South Africa at 17 percent, and then Germany.

South African peaches will continue to benefit from preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time; if not, then South African peaches will be subject to MFN duties in the case of a no-deal Brexit, in the short term.

In the case of a no-deal Brexit, in the short-term, Spanish and German peaches will face MFN tariffs into the UK. If there is a withdrawal deal then Spanish and German peaches will continue to enter the UK market duty free in the short-term.

Currently fresh peach imports on an MFN basis to the EU are subject to entry price conditions.

  1. Beauty products

South Africa is the 17th largest source of imports, providing 1 percent of imported goods.

South African beauty products/ sunscreen will continue to benefit from preferential market access to the UK on a similar basis as under the EU EPA if the SACU+M roll-over agreement is concluded in time; if not, then South African beauty products/ sunscreen will be subject to MFN duties in the case of a no-deal Brexit, in the short term.

Currently these products are however duty free on an MFN basis into the EU.

Sources:

Quantec, 2019; Trademap, 2019; UK Government EU Exit and Trade Tariff Guidance Website; WTO Tariff Analysis Online Facility; South African Development Community – European Union; Economic Partnership Agreement Text.

Wesgro is Cape Town and the Western Cape’s tourism, trade, and investment promotion agency. The Wesgro Trade Promotion Unit is focused on increasing the rand value of exports into global markets and the number of jobs resulting from export orders. To this extent, Wesgro keeps a keen eye on developments in the global trade landscape and works closely with national and provincial government, business and export councils, as well as academic institutions in order to provide high quality service and leverage opportunities across global markets for Western Cape exporters.

Wesgro has taken every effort to ensure that the information in this publication is accurate. We provide said information without representation or warranty whatsoever, whether expressed or implied. It is the responsibility of users of this publication to satisfy themselves of the accuracy of information contained herein. Wesgro cannot be held responsible for the contents of the publication in any way.

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