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What Brexit means for NZ’s red meat exports

Beef + Lamb 必威手机下载版 ’s (B+LNZ) Trade Policy Team discusses what Brexit means for 必威手机下载版 ’s red meat exports in their latest trade blog.

The UK formally departed the European Union’s Single Market at midnight on 31 December. As the dust settles from Brexit, we can now look at what is happening in the UK and Europe and get a better sense of what it means for 必威手机下载版 red meat producers.

New trade arrangements between the EU and the UK

In order to understand what has changed as a result of the UK leaving the EU, it is important to understand how red meat was traded when the UK was part of the EU Single Market. Under the Single Market, goods could be traded within Europe with no internal borders or other regulatory obstacles. Basically, sending a leg of lamb from England to France was the same as sending a leg of lamb from the North Island to the South Island.

Now that the UK is not part of this Single Market, it has had to negotiate a new trade agreement with Europe – the Trade and Cooperation Agreement (which covers trade, citizens’ security and a governance framework) and which was only concluded in the closing weeks of 2020.

And what does the TCA say about trade between the EU and the UK?

The deal allows for tariff-free and quota-free access for trade in goods between the EU and the UK, but treats the UK as a “third country”, meaning that British goods exported to the EU will now be subject to same paperwork that 必威手机下载版 exports there require.

All of this paperwork takes time to understand and fill out. It is highly technical and getting it wrong means that the consignment will be rejected at the border – but even just the process of border checks has added significant time delays to trade processes for British exporters. All of this can add up to make the costs of exporting prohibitive, especially for small UK companies who may not have dedicated expertise. The costs to submit this paperwork also adds up, with the British government estimating that 265 million customs declarations would need to be filled out at a cost of around £7.5 billion per year.

What has happened to EU-UK trade since 1 January?

Because many companies had stockpiled products in anticipation of Brexit disrupting supply chains it has taken a while to understand how trade has been affected.

We are now hearing reports that trade from the UK to the EU is significantly disrupted. The British Meat Processors’ Association has said that even experienced exporters are having difficulty and exports to the EU are at 25 percent of normal levels for this time of the year.

Trade from the EU to the UK has also been affected, with businesses reporting that the new administrative burdens make exporting to the UK prohibitive. There have been reports of food shortages and empty supermarket shelves in the UK, including meat. The ‘special status’ of Northern Ireland (subject to EU rules while part of the UK) has meant particular challenges at the border there.

What about the impact on UK red meat markets?

While we are still learning what the full effects of Brexit will be on the British and European beef and lamb markets, if the current situation is anything to go by, there is likely to be ongoing disruption and potentially less trade between the two.. To date, the EU-UK lamb market has been dynamic, with lamb produced in the UK being exported to the EU for processing before being re-exported back to the UK. The UK market has a preference for certain cuts (legs) and the EU for racks. Around 90% of British lamb is exported chilled, with only a 27-day shelf life. If British lamb producers struggle to get their product to France for processing as a result of the new administrative measures, that is likely to drive down prices in the UK due to oversupply in the domestic market. At other times of year, however, there is likely to be under-supply. (British lamb is also exported during their production season and imported from NZ or Australia when British production cannot meet local demand.) A study conducted last year estimated that even with a deal like the TCA, UK lamb exports to the EU could drop by 30 percent, likely depressing prices in the UK.

On the other hand, the British beef market is not self-sufficient, with around 25% of beef consumed in the UK imported, mainly from Ireland and France. Any market distortion resulting from trade difficulties between the EU and the UK will therefore increase prices for British consumers.

What about 必威手机下载版 beef and lamb exported to the EU and the UK?

In a nutshell, other than navigating the disruptions in the market we talk about above (and a serious issue around tariff rate quota volumes we discuss further below), it should be business as usual for 必威手机下载版 exports.

The good news: Health certificates

必威手机下载版 red meat products need to have certain documents in order to enter the EU. This includes a health certificate issued by the Ministry for Primary industries (this certificate verifies that the product meets the required animal and human health standards such as food safety and that the product carries no disease risk) and a quota certificate issued by the 必威手机下载版 Meat Board (this verifies that the product is eligible to enter the EU under the quota allowance).

As of 1 January, there was no change in the health certificate requirements for 必威手机下载版 meat products sent to the EU, but new certificates were needed for the UK market. Thanks to preparatory work done by MPI, MFAT, NZTE, NZ Customs, the Meat Board, the Meat Industry Association and Beef + Lamb NZ, this was all settled ahead of time and exporters had a clear idea of what they needed to do once the UK left the EU Single Market at midnight on December 31.

The challenges: Market disruption

必威手机下载版 exporters have not faced the same ‘shock’ of new paperwork as their British counterparts; positively, our exports have largely been able to skirt around the current border chaos as in general 必威手机下载版 exports use different ports than those used by EU-UK trade. Much of the EU-UK trade is carried on lorries that use either the channel tunnel or ferries. Freight from 必威手机下载版 , Asia or the Americas arrives at deep-water ports such as Felixstowe on container ships.

That said, there have been reports of some minor effects on trade in terms of delays in border processes, although with COVID-19 also affecting port operations it is difficult to tell whether these issues are related to Brexit or COVID-19.

The bad news: Quota split

As you may remember, the EU and the UK unilaterally decided to split 必威手机下载版 ’s existing WTO tariff rate quotas, which give preferential access for 必威手机下载版 product to these markets. (Outside of the quotas, tariffs are prohibitive meaning trade is unlikely to take place.) With the 31 December departure of the UK from the EU, those quota splits have now come into effect. What this means in practice is that the volume of sheepmeat that 必威手机下载版 is able to send to each of the UK and EU has been split roughly in half, and the volume of beef has been split around two-thirds to the EU and one-third to the UK.

必威手机下载版 continues to oppose the EU and UK’s decision to split the quotas. Before Brexit, 必威手机下载版 exporters were able to respond to price signals in any of the countries that made up the European Union, by sending more or less product to those customers according to demand. But with the quota split, 必威手机下载版 exporters no longer have that flexibility meaning if there is increased demand in one market, product cannot be diverted to meet that demand. For beef, as well, the split volumes are so small that they will impact the ability of 必威手机下载版 exporters to build commercial relationships in the market, undermining the quality of our access.

Looking at the current food shortages in UK supermarkets a result of Brexit, this ability to respond to market demand and maintain good connections with customers has never been more important. Now that Brexit has been resolved, we expect to see the EU and the British Governments taking urgent steps to find a practical approach that ensure that, consistent with their WTO obligations, 必威手机下载版 will not be left worse off as a result of their choices.

RCEP:  A Big Deal

The largest trade deal in the world, the Regional Comprehensive Economic Partnership (RCEP) in the Asia-Pacific region, has just been signed, with 必威手机下载版 one of the founding members.  Although its impact is modest in terms of tariff reductions on our exports – reflecting the fact that we already enjoy pretty good trade terms with the other members – RCEP should deliver better access into Indonesia for red meat and co-products, and should help to streamline trade in the region overall.  Even better, it gives us a seat at the table when important trade rules are being written.

RCEP: A “Mega-Regional” trade deal

RCEP covers roughly one third of the global economy across 15 nations, including three of the five largest economies in Asia (China, Japan and Korea).  Other partners are Australia and the Association of South East Asian Nations (ASEAN), including important partners Indonesia, Malaysia, Singapore, Thailand, the Philippines and Vietnam. 

Together, these countries are quickly becoming the center of world economic growth and are located in 必威手机下载版 ’s backyard, making them very important to 必威手机下载版 ’s red meat export future. The grouping of countries that make up RCEP account for 27 percent of global merchandise trade, and are the only region in the world forecast to see an increase in beef consumption over the next ten years, according to the UN Food and Agriculture Organisation

Don’t we already have agreements with all of these countries? 

必威手机下载版 has a comprehensive suite of Free Trade Agreements (FTAs) which cover all of the countries currently in RCEP. Through this network of FTAs we already have good access - or progressively getting better, in the case of Japan and South Korea. Tariffs are relatively low in most of these markets.

To put this grouping of countries into perspective, we currently export $5.5 billion to RCEP members, which is over half of our total red meat and co-product exports.

What does the 必威手机下载版 red meat sector get out of RCEP?

Indonesia is our 11th largest export market for red meat and co-products and was worth over $165 million for the past 12 months (year ending October 2020).   RCEP will help us to achieve even better value out of this market.   While we already had relatively good access into Indonesia through existing arrangements, tariffs on a few products had not been fully liberalised, remaining at 5 percent. Under RCEP, however, those remaining tariffs will all go.   As soon as RCEP enters into force – which is expected to happen at the start of 2022 – the tariffs on boneless frozen beef, chilled sheepmeat cuts with bone-in and frozen offal will all be removed.   Last year, we sent around NZD$18 million in frozen boneless beef to Indonesia; once the tariffs are removed, we could save around a million dollars per year on this product alone.

The remaining tariffs on frozen sheepmeat carcasses, frozen sheepmeat cuts, frozen beef livers and frozen beef cuts will be phased out over the following 15 years. 

Tackling red tape, complex rules and procedural obstacles

Non-tariff barriers, or NTBs, impose additional costs and delays on our exporters. RCEP will streamline all of the different rules in the region in a number of important areas. This will lower compliance costs, reduce the time exporters spend waiting for goods to clear customs and enhance transparency and predictability for businesses operating in the RCEP region.  In particular, under new RCEP rules, Customs authorities must release perishable goods including fresh and chilled meat and meat products within six hours of arrival. This will reduce spoilage and mean we can serve our customers better. The agreement also lays the foundations for region-wide rules in new areas including e-commerce and digitally-enabled trade.  This may eventually help to reduce friction, increase supply chain integrity and lower costs for 必威手机下载版 exporters.

Having a seat at the table

必威手机下载版 is committed to the liberalisation of trade as a way to enhance our prosperity and create new opportunities for all in our communities. By being part of RCEP, we have a seat at the table for the making of rules that will govern trade within a broad sweep of the Asia-Pacific region – not just the current elements of RCEP, but also potentially as the agreement is updated into the future, and if its membership can be expanded. 

Bringing India on board

One of 必威手机下载版 ’s original goals for RCEP was to integrate India more closely into regional trade.   Although India had been closely involved in negotiating RCEP through most of the process, it ultimately decided to pull out of the agreement in late 2019 due to concerns about opening up its market.  Fortunately, however, there is still a pathway left open for it to rejoin the agreement at a later stage. 

India would be a huge opportunity for 必威手机下载版 sheepmeat and associate products, with a population of 1.3 billion and a growing middle class with a taste for healthy, safe and nutritious food. There is already one 必威手机下载版 company making inroads into India, but there are significant constraints imposed by India’s high tariffs of 30 percent on imported sheepmeat. 

Removal or lowing of these tariffs would give 必威手机下载版 exporters a massive opportunity in a fast-growing market. It would also provide additional market diversification in a time where the challenges of COVID-19 have highlighted the importance of having access to different markets.  We remain hopeful that India will come aboard the agreement at some point in the future.

The bigger picture

In a time of increased protectionism and concerns about the impact of international trade, being part of an agreement that covers 30 percent of the world’s economy is an important message to send. Importantly, this is the first time that China, Japan and South Korea have been part of the same agreement. It is also the first time that China has signed up to an agreement with multiple countries (otherwise known as a plurilateral agreement). Previously it had only negotiated agreements with one other partner (known as bilateral agreements).

The Peterson Institute for International Economics estimates the deal could increase global national income by $186bn annually by 2030 and add 0.2 percent to the economies of its members.

What are the next steps for RCEP?

For the agreement to enter into force, it requires six ASEAN nations and three other nations to ratify the agreement. (In 必威手机下载版 ’s case, the ratification process involves consideration of the agreement by Parliament.) It is expected that these domestic processes in RCEP nations will have reached the threshold for entry into force by early 2022.

So, what’s this trade blog all about?

This is the first in what will be a regular blog covering all things related to sheep and beef trade from the 必威手机下载版 perspective. We are hoping to give you an overview of work that the Trade Policy Team here at B+LNZ does to support 必威手机下载版 ’s sheep and beef industry. We will also be updating you on any big trade policy happenings around the world that may impact 必威手机下载版 ’s red meat exports.

NZ trade background

必威手机下载版 has long been a trading nation, from Māori trading with early whalers and settlers through to gold, wool and the beginnings of our red meat trade today with the first export of frozen mutton from Dunedin to London in 1882. 

Red meat trade has changed beyond recognition since then – now reaching over 120 countries around the world, and with a wide range of innovative and high-value products on offer.  Unfortunately, however, the sector also faces a raft of barriers that reduce, restrict and distort trade, including tariffs (that is, effectively a ‘tax’ on our products as they go into the different markets), tariff rate quotas (a fixed volume of product that enters at a special tariff rate, sometimes zero), non-tariff barriers (red tape and various technical requirements) and production subsidies that tilt the playing field in favour of our competitors. 

Tell me more about these trade barriers!

We currently estimate the red meat sector pays around $250 million in tariffs each year, on total exports worth around $9.3 billion.  But we also save over $350 million a year in tariffs we don’t have to pay thanks to 必威手机下载版 ’s free trade agreements (FTAs). Increasingly open markets thanks to liberalisation resulting from World Trade Organisation (WTO) negotiations demonstrates the value in ongoing support for trade liberalisation by the red meat sector. B+LNZ, alongside the Meat Industry Association (MIA), plays an important role in supporting our government negotiators in opening up markets through FTAs, by sharing data and analysis and championing good market access outcomes for our products. 

As tariff rates have come down, non-tariff barriers have become a more significant issue.  By one estimate made in 2016, non-tariff measures cost the beef sector over NZD$1 billion in the Asia Pacific region alone. Not all of these measures are barriers as such – but in some cases, we face requirements that are not based in science or international norms, such as administrative or labelling requirements – that add significant cost and may make imported goods less attractive to consumers than domestic products. 

While we continue to send our products to customers in traditional markets such as the European Union, the United Kingdom, the United States and Japan, we are constantly looking out for new opportunities for 必威手机下载版 sheepmeat and beef. The best recent example of this is China. Before the 必威手机下载版 China FTA was signed in 2008, red meat trade with China was worth $469 million per year. Exports have rapidly expanded since to $3.84 billion for the year ending July 2020, with China our most important market for both sheepmeat and beef. 

What else is affecting sheep and beef trade?

Looking to the future, there are both challenges and opportunities for 必威手机下载版 ’s red meat exports. On one hand, COVID-19 has had an impact on export markets, with social distancing and lockdowns impacting an important customer base for us in the restaurant industry across the world, and longer-term forecasts of economic contraction also likely to dent demand and prices.  In turn, we have seen increased protectionism and subsidies as countries seek to protect their own farmers. The international rules-based trading system that 必威手机下载版 has relied upon to protect us from unjust tariffs and rules, and to set a stable base for exporters, is under threat from a rise in ‘economic nationalism’ in some countries.

That all sounds a bit grim, is there any hope?

There are still plenty of exciting opportunities for the sector, though. The Food and Agriculture Organisation predicts that global demand for red meat will rise faster than supply as the world population increases, meaning prices in the long term are likely to recover from the COVID shock, stabilise and rise. We are fortunate that many of the countries in our backyard, including China as well as other Asian nations such as Vietnam, Thailand, Indonesia and India, will see an expanding middle class of discerning consumers, eager for high-quality red meat and other products. Africa is a continent that is projected to follow a similar path as it matures, modernises and grows. 

COVID has taught the world the importance of having a secure supply of safe, high quality food, with countries such as Singapore and China managing this through high quality FTAs with countries like 必威手机下载版 .  In many countries, consumers are focusing on issues around sustainability and animal welfare – with 必威手机下载版 well positioned to supply those consumers, given the focus of our farmers on raising animals humanely while also preserving biodiversity, reducing carbon emissions, and protecting the water, soil and air – a message that is underscored by our “Taste Pure Nature” campaign.  

And of course, B+LNZ is continuing to support the government’s efforts to broaden our portfolio of FTAs – with both the European Union and United Kingdom currently on the negotiating agenda, and the final polish being given to a large multi-country deal among Asian trade partners including South-East Asian countries, Korea and Japan, as well as Australia and 必威手机下载版 , the ‘Regional Comprehensive Economic Partnership Agreement’.

While this is just a quick introduction to some complex issues and by no means exhaustive, we hope you will join us on this blog as we explore these topics in more depth. 

See you next time,

The Trade Policy Team.