Business Maverick

BUSINESS MAVERICK ANALYSIS

The four Brexit scenarios for South African exports

Theresa May (Prime Minister of the United Kingdom) and President Cyril Ramaphosa during her working visit at Tuynhuys on August 28, 2018 in Cape Town, South Africa. (Photo by Gallo Images/Brenton Geach)

Many South Africans consider Brexit to be exclusively a European issue. In fact, the consequences for SA, and other large trading partners of the UK, could be huge.

It can be difficult to cut through the noise and understand what Brexit really means for South Africa. The implications, depending on the outcome, will be far-reaching, but it is clear, the export of goods will be one of the areas most tangibly affected.

Wesgro is the official tourism, trade, and investment promotion agency for Cape Town and the Western Cape, and as such has an interest in maintaining a strong relationship with the United Kingdom (UK). This is because the UK is currently the Western Cape’s second largest export market (second only to Namibia); the number one source of foreign direct investment (by a number of projects), and the number one source market of tourists to the Cape.

For South Africa as a whole, the UK went from being the eighth largest export market in 2017, to the fourth in 2018. In 2018, South Africa had a trade surplus with the UK, exporting almost R64-billion worth of goods to the UK and importing R43,5-billion worth of UK goods.

The Western Cape also had a trade surplus with the UK in 2018, with exports totalling almost R10-billion and imports at R5,3-billion. Fruit and wine make up the biggest portion of exports from the Cape to the UK, with skincare products and rooibos tea also featuring significantly.

 

Exports from South Africa as a whole, on the other hand, are topped by platinum and motor vehicles. It is noteworthy that South Africa was the main source of imported grapes and plums in the UK in 2017, and the second biggest source of imported apples, mandarins, oranges, and peaches.

Top competitors for these products include Spain, Chile and France. So what does Brexit mean for South African exports? Well, there are a number of variables. These include, first, what happens between the UK and EU, and second, what happens between the UK and South Africa.

The first depends on what happens with Brexit, and the second depends on whether or not the Southern African Customs Union plus Mozambique (SACU+M) group have a roll-over trade agreement in place with the UK, if and when the UK leaves the EU customs union.

What is happening with Brexit? There has been a lot of talking and voting taking place in the House of Commons recently, but in essence right now there seem to be four possible outcomes: The UK leaves the EU with the Prime Minister’s withdrawal deal; The UK leaves the EU with no deal (no-deal Brexit); The UK leaves with a withdrawal deal, but a different deal (this would have to be renegotiated with the EU, who have warned that they are not willing to reopen negotiations); The UK does not leave the EU (no Brexit).

Given what the Prime Minister said in her statement to the nation on Tuesday evening, the intention is to leave by 22 May, and to leave with her withdrawal deal. The Prime Minister’s withdrawal deal sets a two-year transition period during which the UK and the EU will negotiate a trade agreement to govern their future trade relationship. During the transition period, the UK remains part of the EU customs union.

Whether or not the UK will ultimately leave the EU customs union appears to be up in the air after the events of the week past. The UK may well still opt for a “soft Brexit”, in other words, to remain in the EU customs union after Brexit. This is the option favoured by opposition leader Jeremy Corbyn.

The roll-over agreements If the UK does leave the EU customs union, whether in April, May or at a later stage, it will no longer be a party to any of the trade agreements it is currently part of under the EU. For this reason, the British have been hard at work attempting to “roll-over” the existing trade agreements that they are a party to under the EU in order to ensure continuity of trade preferences with these countries.

This is, however, a mammoth task, and is unlikely to be complete in time for a no-deal Brexit in the immediate future. These roll-over agreements are urgent for the purposes of a no-deal Brexit, less urgent in case of a withdrawal deal, and unnecessary if the UK remains part of the EU customs union.

The SACU+M roll-over agreement

Currently, we trade with the UK under the European Union –Southern African Development Community Economic Partnership Agreement (EU-SADC EPA). This is a trade agreement between the EU on the one hand, and the Southern African Customs Union (SACU) plus Mozambique on the other hand. This agreement allows for 99% of SA goods to enter the UK market duty-free or partially duty-free.

Post-Brexit, if the UK leaves the EU customs union, we will have to trade with the UK under a separate trade agreement. Therefore, the SA government, together with our neighbours in SACU and Mozambique, have been negotiating a roll-over of the EU EPA with the UK. The SACU+M – UK agreement, as it is being called, is incredibly close to being completed, but there are two issues that remain outstanding.

If there is a no-deal Brexit in April, it is unlikely that the roll-over agreement will be in place, because even if an agreement is reached, the South African Parliament will be unable to ratify it as Parliament has been dissolved in anticipation of the elections. Minister Rob Davies has however indicated that it could be possible for the countries to enter an informal agreement of sorts in the interim, should an agreement be reached on the outstanding issues.

Once Parliament has been reconvened after the elections, it would be able to ratify the agreement. The MFN principle In the case of a no-deal Brexit, the UK’s trade regime will immediately revert to the World Trade Organisation (WTO) rules. Under WTO rules, there is something called the Most-Favoured-Nation (MFN) principle, which dictates that a country has to extend the same (most favourable) tariff rate to all countries alike (who are WTO members).

There are, however, certain exceptions to the MFN rule, such as having entered into a trade agreement with a country to reduce tariffs below MFN, or unilaterally providing lower tariffs or duty-free access to developing countries. Therefore, if the UK leaves the EU customs union, imports to the UK from all countries that do not have a preferential trade agreement or arrangement with the UK will face tariffs on an MFN basis.

Similarly, UK exports will face those countries’ MFN tariffs. Some countries, like the USA and Australia, have always traded with the UK under MFN tariffs (EU MFN). But for a country like South Africa that has historically enjoyed preferential access to the UK market, suddenly having to pay duties on exports to the UK will be a big knock.

A few weeks ago the UK published their temporary customs duties, which will be applied for one year on an MFN basis in case of a no-deal Brexit. These are thus the tariffs that South African goods will face upon entry into the UK in case there is a no-deal Brexit, and if we do not have a roll-over agreement in place at the time.

The UK’s temporary tariffs include duties on, among other things, vehicles, beef, and sugar, which is problematic for South African and SACU exports as a whole. These duties are in fact favourable to Cape exports; top Cape exports are all duty-free and quota free. However, this means that the same products from competitor countries will also be duty-free and quota free.

For example, Australian wine, which under normal circumstances faces a tariff, will also be duty-free and quota free, meaning South Africa loses the competitive advantage it enjoys under the EU EPA. So where does all this leave us?

Scenario 1: The UK leaves the EU with the Prime Minister’s withdrawal deal the UK remains part of the EU customs union and single market for a two year transition period and nothing changes in the short term. SA continues to trade with the UK under the EU EPA and there is no immediate disruption at the UK border.

If the UK leaves the EU customs union after the transition period then the SACU+M roll-over agreement kicks in and South African goods continue to enjoy preferential access to the UK market.

Scenario 2: The legal default for the UK’s exit was 29 March, and is currently 12 April unless another extension is agreed to by all parties. A no-deal Brexit could happen on 12 April or at a later date. If the UK leaves the EU without a deal in place, then trade between the UK and EU, and between the UK and all countries with which it does not have a roll-over agreement, reverts to WTO rules.

This is likely to result in major and widespread disruptions in the short-term, for example, customs and border checks will have to be introduced at the border, and regulatory standards will no longer be automatically accepted between the EU and UK. Goods being shipped to the UK via European ports may face long delays at border checks. There will also be disruption to South African goods manufactured using inputs from the EU and exported to the UK or vice versa.

If South Africa does not have a roll-over agreement in place with the UK on the date of a no-deal Brexit, SA goods will face UK’s MFN tariffs; if the roll-over agreement is in place, then SA goods will continue to qualify for preferential access.

Scenario 3: The UK leaves with a different deal. Leaving with a withdrawal deal means an orderly and managed Brexit. Changing the deal currently agreed to would however require convincing the EU to reopen negotiations, which would likely require a substantial extension of the Brexit deadline (and will mean that the UK has to take part in upcoming EU elections).

It will further extend the uncertainty of what Brexit will look like. For South African goods exports, if the UK remains in the EU customs union then trade continues under the EU EPA; if the UK leaves the EU customs union, trade will take place under the roll-over agreement (if it has been concluded).

Scenario 4: No Brexit. If a second referendum were held and the UK decided to remain in the EU after all, then nothing changes and South Africa continues to trade with the UK under the EU EPA.

While there are many variables and potential hiccups in the short term, ultimately South African goods will have preferential access to the UK market in the long run, whether under the EU-SADC EPA, or the SACU+M- UK agreement. If the UK does leave the EU customs union much will also depend upon what the future trade relationship will look like between the UK and EU. The UK is an important export market and Brexit could have a very tangible impact for South African exporters. DM

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

Karen Bosman does strategic research and public affairs at Wesgro – Cape Town and the Western Cape’s official tourism, trade and investment promotion agency

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