Don’t let Brexit fatigue set in, meat exporters warned

Sarah Salmond, Russell McVeagh
Sarah Salmond, Russell McVeagh.

A legal expert is warning New Zealand’s meat exporters to avoid ‘Brexit fatigue’ setting in. Planning needs to continue for potential ‘no deal’ disruption in the UK and EU markets to avoid commercial risk.

In her role as special counsel, head of international trade, at law firm Russell McVeagh, Sarah Salmond has been advising a number of firms on Brexit-related issues, including conducting impact assessments, providing regulatory and commercial advice, reviewing supply contracts, and working with legal partner firms in the UK and the EU.

Even with her first-hand experience of UK and EU trade law: “It’s so incredibly complex,” she states. “Very few would even dare to suggest that they really understand the intricate details of how the UK and EU are intertwined.”

As Salmond relates, the current situation is far from simple. Boris Johnson was elected as the new Conservative Party Leader – and Prime Minister – on 23 July. If everything goes well and a withdrawal agreement is approved, the UK’s departure from the EU will start on (or before) 31 October. In that case, there should be no major risks for New Zealand’s exporters as the UK would probably then enter an agreed transition period to formally exit the EU at the end of December 2020.

However, the chance of the UK crashing out with ‘no deal’ has now increased significantly as the parties are simply running out of time with the European summer holidays and two parliamentary recesses to come in the UK.

“British politicians who expect to be able to renegotiate key aspects of the withdrawal agreement – such as the Irish backstop arrangements – are dreaming,” she says.

Personally, Salmond believes the existing withdrawal agreement negotiated by Theresa May: “is essentially the best thing that could ever be on offer and anyone who expected more than that was overly optimistic.”

If the UK and the EU fail to conclude a withdrawal agreement by 31 October, the UK could request more time to negotiate, but it would only take one EU member state to object, and the UK could be ejected from the EU with ‘no deal’.

A snap general election is off the cards, Salmond feels, as Boris Johnson does not want it, and it would need a two-thirds majority in the House of Commons to call one. A second referendum is a big legal process and a huge operational undertaking. Preparation for that would take at least 22 weeks and that would extend beyond 31 October, she notes.

The option to invoke Article 24 of the General Agreement on Tariffs and Trade touted as a solution by several of the leadership contenders to maintain tariff-free trade between the two trade partners is a non-starter too, in Salmond’s opinion.

“The legal position is really clear. You cannot invoke Article 24 unless you have concluded a bilateral trade agreement, and in a ‘no deal’ scenario, there is, by definition, no agreement. In addition, there is no such thing as a ‘quickie’ trade deal that would satisfy the requirements of Article 24 and the EU has made it very clear that under no circumstances will they do a trade deal with the UK, before the divorce issues are settled,” she explains.

Against this uncertain background, New Zealand meat exporters need to act now to protect their businesses, if they have not done so already, she says.

In Salmond’s opinion, some commentators have underestimated the risks posed by Brexit, as they have only been thinking about regulatory continuity, through veterinary and standards agreements. She believes exporters are not being given the tools they need to prepare for the commercial risks they are facing.

The biggest risk is that significant bills for meeting the new commercial and regulatory requirements will quickly mount up, which meat exporters might have to shoulder, she says.

The deteriorating quality of market access for both the UK and EU single market, is another concern. Referring to the proposed 50:50 split in tariff-rate-quotas between the UK and EU, Salmond notes exporters won’t be able to move consignments around the EU as they previously did to access the highest paying markets for different products.

“There will be costs and losses associated with that,” she says.

At the moment, over 90 percent of British production of sheepmeat is currently exported to the EU, duty free. If Brexit happens and those exports are no longer possible, there is also the potential for a surplus of lamb on the UK market, which would result in declines for both demand and prices for New Zealand sheepmeat.

In addition, the GBP:NZD exchange rate, which has been depreciating since the start of the negotiation period, has the potential to drop further – markedly – when the UK finally leaves the EU. She advises exporters who have already negotiated contracts in pound sterling to make moves now to mitigate the risk of potential foreign currency fluctuations.

Salmond warns, after two years to date, there is also a risk of Brexit fatigue setting in for companies: “This is not like Y2K, no governments are going to step in and save you this time.”

Exporters must continue their planning, she urges. “Yes, there are risks, but people need to persevere and be vigilant. There are also things you can do to mitigate the situation.”

Meat exporters working with the UK/EU can consider the following options, says Salmond:

  • Monitor the introduction of new market access conditions – are there new tariffs, taxes, fees, charges or quantitative restrictions? Will your trade remain possible and profitable?
  • New regulatory compliance obligations – Are new regulatory compliance obligations likely to be introduced, such as standards, or registration, certification and documentary requirements? If so, are those obligations material and who would perform them?
  • Useful customs facilitations and procedures – If your market access conditions are likely to deteriorate, could you improve them by using UK customs facilitations or procedures like the UK’s Inwards Processing Relief or Trusted Trader schemes?
  • Map supply chains so you know where your product is going and where it is needed. There may be significant border and administrative delays so consider alternative supply chain arrangements to mitigate risks of transport delays and the shortage of warehousing space in the UK. This will be especially important if you are exporting chilled product to the UK.
  • Do you need new representatives – You will not be able to use the same agent for both the EU and UK (as they will require different registrations and EORI numbers). If you haven’t already, jump on a plane and find a new agent now, she urges.
  • Review your contracts carefully – Instead of agreeing fixed prices, try to renegotiate a flexible arrangement, allowing more time for potential delays and look at smart use of your overseas currency accounts to mitigate any exchange rate fluctuations.
  • Freight on board (FOB) – When negotiating contracts consider doing so in Freight-on-Board (FOB) terms, rather than the DDP terms, which would mean the financial risks fall on the importer.
  • Do your existing contractual clauses offer enough protection? Consider change control mechanisms, a force majeure clause or material adverse change clause. If not, could you insert a bespoke Brexit clause to mitigate your risks?
  • Supply chain partners – Are your supply chain partners prepared for Brexit and is there merit in discussing contingency arrangements with them?

Sarah Salmond, Russell McVeagh special counsel and head of international trade, and is a board member of the New Zealand International Business Forum. She can be contacted by email sarah.salmond@russellmcveagh.com.

IMTA UK, Brexit timeline
This handy timeline produced by the UK’s International Meat Trade Association (IMTA) in early July (and reproduced with permission) gives some indication as to the route map ahead.

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