Is St Lucia trade relationship with UK in question?

Will St Lucia Continue to Have an Export Trade Relationship with the UK once the UK Leaves the EU Customs and Single Market?

St Lucia’s exports to the UK are dominated by bananas, which account for fully 83% of total exports to the UK. In addition, on the back of this banana trade there have been long standing efforts to develop other agricultural product exports to the UK market. While the value of these non-traditional agricultural exports to date have been small (€389,074 in 2018), these products account for a further 6% of total exports (1).  This trade however could be profoundly undermined were existing St Lucian banana exports to the UK to fall away.

The departure of the UK from the EU customs union and single market from 1^st January 2021 will result in a 53% reduction in St Lucia’s exports to the EU under the CARIFORUM-EU EPA. This would not be a problem if the process of the UK’s withdrawal from the EU customs union and single market were managed in such a way as to sustain current St Lucian exports to the UK. However, on the 6^th February 2020 the UK government announced the launch of a public consultation on its future MFN tariff policy (2). This public consultation is seeking the opinion of UK stakeholders on whether the UK government should remove all tariffs on inputs used by UK industries and all tariffs where the UK has no or limited production interest (3).

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This question reflects strong pressure from one wing of the Conservative government/party to clearly differentiate the UK’s future MFN tariff policy from that of the EU, by taking steps which appear to yield immediate benefits to UK consumers, without harming the interests of UK producers. As early as February 2019 when addressing the House of Commons International Trade Committee, the then UK Secretary of State for International Trade, Lian Fox, cited bananas as an example of a product where the UK has no production interest and consumer gains could be secured (4).

While in 2019  UK proposals for the MFN tariffs to be applied in the event of a ‘no-deal’ outcome to the UK/EU Withdrawal Agreement negotiations excluded bananas from the ‘zero production-zero MFN tariff’ approach, this is now under review, with all tariff lines now being part of the month long public consultation on the UK’s future MFN tariff regime scheduled to end on 5^th March 2020. The issue of the abolition of UK MFN import tariffs on bananas is therefore once more on the table of policy options under consideration (3).

Photo courtesy http://fairtradeamerica.org/

The outcome of this review will be vital for St Lucia’s future export trade relationship with the UK, since any removal of the UK MFN tariff on bananas would de facto eliminate the tariff preferences St Lucian banana exporters would enjoy under the CARIFORUM-UK Continuity Agreement.

This situation arises from the dual aspect of the tariff preference coin: the duty free -quota free access enjoyed by St Lucian banana exporters to the UK under the Continuity Agreement concluded by CARIFORUM and the MFN tariff of €114/tonne which the UK currently applies to non-preferred banana imports (€75/tonne for preferred $ banana suppliers).

If there is no longer any MFN import tariff on bananas, the tariff preference arising from the granting of duty-free access to St Lucian banana exporters disappears, since all suppliers enjoy full duty-free access for their exports.

This is a dimension of the current discussions on the removal of MFN import tariff on bananas which is being overlooked in some quarters of the UK government. Significantly this policy change would not only impact on suppliers of bananas from countries where MFN duties are applied (e.g. India and Brazil)  but also on all other banana supplies who enjoy reduced import tariff access to the UK market under ‘rolled over’ Continuity Agreements (e.g. Ecuador, Colombia, Peru, Costa Rica, Panama, Guatemala, Nicaragua, Honduras, El Salvador). Exporters currently trading under preferential trade agreements which reduce the import tariff paid from the MFN rate of €114/tonne to €75/tonne would simply switch from exporting under the terms of their bilateral trade agreements, to exporting under MFN terms which are open to all countries. 

The removal of MFN import tariff on bananas would thus effectively remove the €75/tonne import tariff applied to some of the most globally competitive banana exporters. This needs to be seen in a context where these countries already dominate the UK market (over 2/3^rd of all UK banana imports).

In addition, by reducing the costs of exporting to the UK market by €75/tonne relative to the costs faced in serving the EU27 market, the UK market would become a far more attractive destination for $ banana exporters from countries such as Ecuador and Colombia. This is likely to see existing exports from these countries to the EU27 diverted to the UK market. This would be likely to have a severe impact on banana prices in the UK.

The situation is particularly acute for St Lucia since in an increasingly difficult market situation banana exports to the UK have been focussed on the Fairtrade market. However, Ecuador, one of the countries which would benefit from the removal of the UK MFN import tariff on bananas, is the leading global exporter of Fairtrade bananas. Tariff reductions which have been introduced on imports of Ecuadorian banana since 2017 have already seen an expansion of certified Fairtrade banana suppliers in Ecuador (5). This is likely to increase competition and exert a downward pressure on banana prices on the UK market. This would then reduce the overall gains obtained from the Fairtrade premiums which St Lucia’s market positioning strategy has secured for St Lucian producers to date.

What is more the Ecuadorian banana sector is increasingly responding to consumer trends by producing and exporting dual certified Fairtrade/organic bananas (5). This needs to be seen in a context where St Lucia’s agri-climatic conditions make it difficult to follow the evolving market trend for differentiated banana exports towards dual certified organic/Fairtrade bananas.

It is against this background that any sudden removal of the UK MFN tariff on bananas from 1^st January 2021 could provide the final nail in the coffin of St Lucian banana exports.

St Lucian Banana Exports to the UK (tonnes)

Comment and Analysis

There can be no contesting the long-term decline which has been underway in St Lucia’s banana export trade with the UK. In 1992 when the EU single market came into effect, St Lucian banana exports to the EU stood at 132,000 tonnes (6), by 2009 the year before the Geneva Agreement on Bananas began to cut import tariffs, St Lucia’s export volumes had fallen to 33,291 tonnes. By 2018 export volumes, which are regularly impacted by hurricane damage, had stabilised at 9,728 tonnes, generating an export revenue of €€5,444,544.

However, it is difficult to see how this market share could be sustained if the UK were to abolish import tariffs on bananas, given the ready availability of Fairtrade bananas from more competitively priced suppliers who can also offer organic certification (notably Ecuador).

Against this background it is essential for St Lucia’s future trade relationship with the UK that the UK’s existing MFN tariff continues to be applied to banana imports.  This needs to be seen in a context where, despite the growing importance of the tourism sector, agriculture still employs 20% of the St Lucia’s workforce (6).

This would suggest a need for the Government of St Lucia to bring to the attention of the UK government the profound impact any change in the UK banana tariff would have on St Lucia’s export trade relationship with the UK. This can best be undertaken through direct diplomatic representations to the UK government on the need to ensure the traditional trade preference plank of the UK’s “trade for development” policy is fully taken into account in the current MFN trade policy review. The Government of Belize has already taken an initiative in this regard.

It should be pointed out that the de facto abandonment of tariff preferences which an across the board move to zero MFN tariffs would entail, would not only carry profound implications for small island developing states (SIDS) such as St Lucia, but also a wide range of least developed and land-locked developing country partners who currently export under preferential trade arrangements to the UK (including in the Caribbean fellow banana exporters Belize and the Dominican Republic).

It should be highlighted how a detailed assessment needs to be made of the impact of the removal of MFN tariffs on the SIDS, least developed and land-locked developing country suppliers who have traditionally serve the UK market in the affected products.

The implications of the removal of MFN import tariffs for these established suppliers needs to be captured in submissions made by both concerned private sector bodies (e.g. WINFA – Windward Islands Farmers Association) and concerned governments to the UK Government’s current on-line consultation process on its MFN tariff review (7). Specifically, the Government of St Lucian should consider completing a technical submission to the UK’s on-line MFN tariff review consultation setting out the consequences in St Lucia of the pursuit of a ‘zero production-zero MFN tariff approach’.  This should be contrasted with the marginal 1 penny per banana gain such a change in UK tariff policy would generate for UK consumers. This article was provided courtesy of epamonitoring.net.