Written evidence submitted by Jeremy Miles AS/MS, Counsel General and Minister for European Transition, (BAT0016)

Thank you for giving the Welsh Government the opportunity to contribute to your enquiry into Brexit and Trade: implications for Wales. Throughout the negotiations between the UK and the EU on our future relationship, the Welsh Government has sought to play a constructive role in influencing and informing the UK position in order that the Government could speak for all parts of the UK. By working with us and the other devolved governments, the UK Government would have been able to approach the negotiations with the EU from a position of unity and strength. The UK Government, however chose to take a different approach and shut the Devolved Governments out of the negotiations. We have had no real opportunity to influence the negotiations and our repeated attempts to ensure that the UK Government was negotiating in the best interests of Wales have been ignored. We have therefore been clear that responsibility for the success or failure of the negotiations rests firmly with the UK Government. The fact that the negotiations seem set to yield a very ‘thin’ free trade agreement- assuming agreement is reached at all – is of the UK Government’s own making. They refused the calls from us and many others to seek an extension to the transition period to give themselves the breathing space necessary to complete such a complex set of negotiations, recognising the changed circumstances arising from the Covid-19 pandemic. Instead the UK Government insisted that it was perfectly able to respond to the Covid-19 pandemic and achieve a good outcome to their first trade negotiations in over 40 years. It is critically important that a deal is achieved which protects the economic interests of Wales and is in the best interest of our businesses, our workforce and our communities. The UK Government must redouble its efforts to reach a deal, which minimises the damage to the economy. It would be inexcusable to reach the end of negotiations with no deal, or only a basic deal, knowing the damage this would cause to jobs and livelihoods – layered on top of the devastating impacts of Covid-19 – as well as to our security and the fabric of people’s lives. My responses to your specific questions are annexed to this letter.

Yours sincerely,

Jeremy Miles AS/MS Cwnsler Cyffredinol a'r Gweinidog Pontio Ewropeaidd Counsel General and Minister for European Transition Call for Evidence: The Welsh Affairs Committee

What are Wales’ priorities for future trade relations with the EU, and what are the implications of any future UK-EU trade and customs arrangements for Wales?

The Welsh Government has consistently and coherently advanced the priorities of Wales for future trade relations since the referendum in June 2016, based on evidence about likely impacts on businesses and jobs in Wales.

In our January 2017 White Paper Securing Wales' Future, and our subsequent policy paper Trade Policy: the issues for Wales we set out proposals for trade with the EU post-Brexit and made the case for the UK retaining full access to the EU Single Market and membership of a customs union with the EU. This paper, supported by an analysis from Cardiff Business School, argued that the Welsh economy was best protected by this approach. It also recognised that economies and global trading patterns are never stagnant and accepted that there were trading opportunities outside of Europe.

At the beginning of 2020, we published The Future UK/EU Relationship: Negotiating Priorities for Wales which - in the light of the UK Government’s mandate from the General Election and the Political Declaration agreed between the UK and the EU in autumn 2019 - set out our views on priorities that we believed could still be negotiated to reflect Wales’ economic, social and environmental interests.

They included:

 Prioritise access to the EU market, not for ideological reasons but because it is of overwhelming importance to our economy particularly Wales’ manufacturing, agriculture and services sectors.  No tariffs on trade with the EU and minimising non-tariff barriers – which are often even more damaging than tariffs.  Maintain deep co-operation on all aspects of security, including the environment and health. Covid has shown that threats to our way of life can come in unexpected forms and has highlighted the need for governments across Europe to work in partnership.  Continued access to EU programmes which are already open to countries outside the EU and which have done so much for our economy, our young people and the richness of our lives – for example Erasmus+, Horizon Europe, Creative Europe and INTERREG.

Over the spring and summer of this year, we also sent a series of letters to the UK Government covering the 11 work streams for the negotiations, namely the Level Playing Field, Governance, Law Enforcement and Judicial Cooperation, Fisheries, EU programmes, Trade in Services, Trade in Goods, Mobility, Energy and Civil Nuclear Cooperation, Transport and Civil Judicial Cooperation. With only two months to go before the end of the transition period, we still do not know the nature of our trading relationship with the EU after 1 January of next year. However, whether there is a deal or not the new trading relationship with the EU will be significantly worse than the one we currently enjoy, with substantial new barriers to trade, which will have a serious economic impact, compounding the risk to businesses and jobs that arises from the pandemic.

We fully accept that international negotiations are reserved although we have implementation powers in a number of key areas. We therefore accept that the principal responsibility for the conduct of the UK’s trade policy will rest with the UK Government but with a significant intersection with devolved powers in areas such as environmental standards, economic development, agriculture and skills and qualifications. Decisions on new trading relationships both with the EU and the wider world must be taken in close co-operation between the UK Government and Devolved Governments in order to reflect fully the interests of the whole . The UK Government has missed the opportunity to present a united UK position on the negotiations and has also been unable to assure the EU that what is agreed can be implemented effectively across the whole UK.

The economic implications for Wales of a new trading relationship are significant. Wales is an outward-looking, globally trading nation. Our businesses trade across the world, in 2016 exports from Wales were worth £14.6 billion and in 2015 service exports were £1.7 billion. Our economy is closely integrated into the Single Market and 61% of our identifiable goods exports and just under half of our imports are to and from the EU, along with 35% of services exports.

Analysis by independent economists indicates that were the UK to leave the transition period with no agreement and were to continue to trade with the EU on WTO terms, over the long term (10-15 years) this could result in incomes being up to around 10 per cent below what they would otherwise have been. The analysis also shows that, while losses of income under a bare-bones Free Trade Agreement would be somewhat less, they would still be large, at up to around 6 per cent of annual income.

In addition, if the transition to a new trading relationship with the EU is disruptive – as will be the case in the absence of an agreement emerging from the current negotiations - this will cause short term economic harm, and will probably either prolong the current recession or cause a new one. It is impossible to predict the scale of any such effect with precision, although previous analysis by the Bank of England suggested that resulting recession could be large, and might not be much less severe than the one experienced as a result of the financial crash in 2008. If anything, Wales is likely to be more severely affected than average by the transition to a new trading relationship, as Wales is even more reliant on the EU as an export market than is the UK as a whole.

The Covid crisis and associated economic contraction does not change the analysis of long run impacts described above. And as the effects of moving to less advantageous trading relations with EU persist over the long run, the cumulative effects are likely to be greater than those resulting from Covid. In addition, there is abundant evidence that uncertainty adversely affects business investment, with negative effects on future growth in productivity and income. Business investment is already severely constrained by the effects of the Covid crisis, and further uncertainty over the transition to a new trading relationship will only worsen this situation.

The practical implications of new border arrangements between the EU and the UK will also impose significant extra bureaucratic burdens to businesses in Wales which either export to or import from the EU27. The requirements are particularly onerous for agri-food products. Products that can affect human, animal and plant health such as live animals, products of animal origin, plant products, high risk foods and feed from third countries (including the EU after the transition period ends) will be subject to pre-notification and documentary checks, and enter GB through a designated Border Control Post (BCP). Certain other controlled goods which can have environmental impacts (such as chemicals, fertilizers, pesticides etc) will also need to be checked, but not necessarily at the border. In Wales, these obligations are the responsibility of Welsh Ministers. UK Ministers are responsible for the increased volume in customs and other borders checks. We currently have no BCPs in Wales so this breaks new ground for the Welsh Government, Local Authorities and many of the port owners.

For imports from the EU, additional requirements are to be phased in over a six month period starting in January 2021 and ending in July 2021. The introduction of full controls (including a requirement for entry at suitable BCPs or inland sites) will take place from July 2021 onwards. If the necessary border infrastructure facilities are not delivered on time our ports will not be able to handle certain products and importers would need to look for alternative points of entry into GB.

Where the construction of a BCP on site at a port is not possible given space limitations, the UK Government has decided that inland sites should, instead, be constructed to serve the relevant Ports Of Entry. We are likely to need two sites in Wales for sanitary and phytosanitary checks; one serving the Port of Holyhead; and one to serve Fishguard and Pembroke / Milford Haven.

Delivering in time for the 1 July 2021 is incredibly tight, planning and construction of these type of sites is usually measured in years, rather than a short number of months. As a result, contingency measures will almost certainly be needed for 1 January 2021, and also for a scenario in which the sites aren’t ready by 1 July 2021 to undertake the sanitary and phytosanitary checks for which we are responsible. Following the UK’s withdrawal from the EU, what opportunities will there be for Wales in trade negotiations with non-EU countries, and how should the most important areas to the Welsh economy be represented in different trade models?

Free Trade Agreements (FTAs) with the rest of the world – even the USA – cannot compensate for the loss of full and unfettered access to the EU Single Market, even at the most ambitious end of the range of realistic outcomes. We believe that the negotiation of the priority FTAs should be seen as complementary and not a substitute for a deep and substantial FTA with the EU.

The UKG’s own analysis shows the estimated GDP impacts of agreements with Japan, US, Australia and New Zealand to be very small – 0.07% for Japan, 0.07- 0.16% for the US, 0.01-0.02% for Australia and 0.00-0.00% for New Zealand.

By contrast, all the credible evidence shows that a no or ‘low’ deal outcome with the EU will have a profound and long term effect on the UK economy. Even the UK Government’s own analysis forecasts that a no-deal Brexit would reduce UK Gross Domestic Product (GDP) by 7.6% after 15 years, while reaching a free trade agreement (FTA) with the EU would lead to a smaller decline of approximately 4.9%.

Trade is a vital part of ensuring the prosperity of Welsh people through fuelling the economy, generating jobs and providing choice for consumers at the most competitive prices. In 2018 exports of goods contributed 23% to our GDP. Hence the Welsh Government clearly has an interest in ensuring that trade policy delivers for Wales.

As a result the Welsh Government has been working closely with the Department for International Trade (DIT) to develop a constructive and positive working relationships. Devolved Governments have been working closely with DIT to put in place a concordat which will formalise the working arrangements for international trade negotiations (see also the response to question 7). We continue to urge DIT to prioritise the finalisation of this agreement.

The Welsh Government continues to develop its evidence base and engage with stakeholders to ensure that our understanding of the opportunities and risks is robust. To aid this we have established the Trade Policy Advisory Group to provide expert advice to the Counsel General and Minister for European Transition and senior Welsh Government officials on trade policy matters and help shape the Welsh Government position. In addition we undertook a pilot Trade Survey for Wales in 2019, inviting 8,000 businesses with operations in Wales to provide 2018 and 2017 information on sales and purchases of goods and services. The second Trade Survey for Wales launched in October and will close by Christmas. Results will be available by Spring 2021.

Depending on the content of each Free Trade Agreement negotiated, a number of opportunities exist: these include opportunities for our agri-food sector if access can be secured, the removal and reduction of technical barriers to trade which could help our manufacturing sector or the recognition in deals of ‘servicification’ or ‘mode 5’ as it is known. How will the revised Northern Ireland Protocol affect the access of goods to and from Wales as part of the UK internal market, including customs checks, processes and declarations?

There is still far too little clarity on the implications of the Northern Ireland Protocol at this time. In relation to goods flows between Wales and Northern Ireland it is difficult to state exact figures as these goods are not currently subject to checks, but we estimate that about 30% of Holyhead’s current traffic is travelling to or from Northern Ireland, including a large amount of food. We still do not have clarity from UK Government on what the default position for this traffic will be from 1 January and beyond.

Welsh ports play a significant role in the movement of goods within the UK market, and a route-based approach will not deliver the ‘unfettered market access’ that Northern Ireland has been promised. The UK Government needs to work urgently with us to clarify what arrangements will be put in place to ensure Northern Irish businesses are still able to use Welsh ports as key gateway to Great Britain, and similarly that Irish businesses will not face fewer checks by going through Northern Ireland and avoiding Welsh ports.

The UK Internal Market Bill seeks to deliver on the UK Government’s commitment for ‘unfettered market access’. The Statutory Instrument that defines ‘qualifying Northern Ireland goods’ has only recently been laid by the UK Government and we are in the process of interrogating the implications of the Bill in light of that definition.

In particular, clause 43 of the Bill precludes new checks, controls or administrative processes on qualifying goods as they move from Northern Ireland to Great Britain. This currently only applies to the direct movement of qualifying Northern Ireland goods between Northern Ireland and Great Britain. This has the potential to disadvantage trade flows via Ireland, and therefore Welsh ports. We are discussing this, and the approach to its borders policy more broadly with the UK Government.

In addition, while UK Government reports suggest work is progressing to agree the operation of the Northern Ireland protocol, including defining “at risk” goods, the view from the EU is less positive, and is made significantly worse as a result of the clauses in the UK Internal Market Bill. The Bill has clearly undermined relationships and the UK Government should remove the clauses in the Bill that breach the Withdrawal Agreement and the Protocol. What additional capacity is required at Wales’ ports to manage checks and customs arrangements for GB-NI trade after the implementation period?

Our Irish Sea facing ports will need to have appropriate infrastructure, systems and resources in place to meet HMRC’s customs requirements and to allow the relevant agencies and local authorities to undertake sanitary and phytosanitary checks on imports of live animals, products of animal origin, plants and high risk food not of animal origin.

As most agri-food trade entering the ports of Wales has arrived from the EU, such infrastructure does not presently exist in Wales. There is limited capacity at ports for new infrastructure and so two border control posts are being constructed at inland sites; one to serve the port of Holyhead; and one to jointly serve the ports of Milford Haven, Pembroke and Fishguard. The Border Operating Model, published in early October by the UK Government, provides for the ‘phasing in’ of sanitary and phytosanitary controls between January and July 2021, where the full range of checks will take place at the border. Border Control Posts for SPS checks therefore have to be in place by July 2021 at the latest.

The Welsh Government is working with UK Government Departments and agencies which will deliver services at these BCPs such as the Animal and Plant Health Agency, the Food Standards Agencies, and the local authorities. We are working through the capacity challenges with delivery organisations and with DEFRA where we may be able to increase training and capacity for export health certification and controls on imports. It is not yet clear whether export health certification will be needed in respect of transit to Northern Ireland.

At present the provisions of section 5 of the Internal Market Bill make it clear that unfettered market access would only apply on direct routes between Northern Ireland and Great Britiain, for example between Belfast and Cairnryan, or Liverpool. In this scenario goods from Northern Ireland arriving at Welsh ports would be subject to the same rules and controls as those arriving from the Republic of Ireland.

This would seem to be at odds with the UK Government’s commitment to unfettered access for goods moving from NI to Great Britain. The Welsh Government would like to ensure such unfettered access through Welsh ports is maintained to avoid any distortions in current trade routes through a back door into Great Britain through Northern Ireland.

If unfettered access were to be enabled for NI Qualifying Goods arriving in Welsh ports then such goods could simply bypass the inland Border Control Post where sanitary and phytosanitary controls take place. However, the UK Government would also need to waive customs controls in relation these products to ensure truly unfettered access. What benefits could freeports bring to Wales as part of the UK’s post-Brexit trade strategy?

The Welsh Government has been engaging with HM Treasury on the implementation of Freeports across the UK, including the potential introduction of Freeports into Wales, and in particular the emerging role they may play in respect of regeneration and contributing towards economic recovery.

However, our role in shaping the policy to date has been minimal and we continue to have substantial concerns about the risks associated with the UK Government’s determination to pursue a policy of setting up Freeports. We are sceptical about the stated opportunities they would bring and our concerns will need to be resolved before we could give any indication of support towards the establishment of Freeports in Wales – or across the UK.

We are very concerned at the prospect of harmful economic displacement which could pull employment and opportunity away from the communities which depend upon those jobs. Our concerns apply both within Wales, but most substantially in respect of displacement which could occur across the Wales/England border. We are also particularly concerned around the damage that could be caused by economic activity in relatively less prosperous areas being displaced into already highly affluent parts of the UK. The devolution of some taxes to Wales also means that any displacement of economic activity threatens to erode our tax base.

We have pressed to see the analysis and modelling work being developed for the Freeports proposal in respect of the potential for displacement, and were led to understand that this would be shared, though the Treasury has moved backwards from this commitment in recent weeks. A concluded view will necessarily only be possible having considered this analysis and modelling.

We also believe that the UK Government should ensure the processes and funding settlements for all Freeports are fair, consistent and proportionate across the UK. Failing to so would will generate inconsistency, confusion and could disadvantage non-English Freeports relative to their counterparts. However, HM Treasury have told us the Barnett formula will be the starting point for Welsh Freeports, which is unacceptable. If Wales has, for example, one of ten of the Freeports, the Welsh Government should get one-tenth of the funding, not the 5% we might receive under the Barnett formula.

Against the backdrop of these concerns, the UK Government is expected to release its bidding prospectus before the end of the year. Indications are that they will be asking Welsh Ministers to make a substantive decision on whether they wish to pursue a Freeports policy within Wales at that point as it seems they will not share with us substantial and important elements of policy until the announcement is in the public domain. This is a poor reflection on the UK Government’s mode of working with the Devolved Governments and is an unnecessary obstacle to reaching the best outcome in the interests of Wales and indeed the UK more generally.

The Welsh Government will be unable to make this decision until we have been provided with sufficient information on the full range of measures. The principle of the policy is around driving regeneration (via spatial economic growth), which hinges on the impact of multiple policy levers being deployed at the same time, such as customs, tax, planning, investment, etc. Assessing these levers in isolation from one another will not be sufficient, and we will need to understand the whole picture in order to understand the cumulative impacts, both positive and negative.

My colleague, Rebecca Evans MS, Minister for Finance and Trefnydd, recently gave evidence to the House of Commons International Trade Committee in respect of their inquiry on UK Freeports. Our concerns, which are for the most part matched by the other devolved nations, are detailed further in the linked transcript.

https://committees.parliament.uk/oralevidence/1012/html/ How will any future trading models affect agricultural trade in Wales, including the level of trade, tariffs and export of Welsh food and drink?

New Free Trade Agreements (FTAs) are likely to have some impact on agricultural trade in Wales, although the level and nature of impact will depend on the country a deal is with and the provision made within that deal.

At the moment, the majority of our agricultural trade (i.e. meat, livestock, dairy) takes place within the EU single market. Despite some growing markets in the rest of world, over 78% of Wales’ meat and dairy exports still go to Europe. In terms of Wales’ Food and Drink exports, in 2019 Wales exported £426m worth of goods to the EU. This amounted to 75% of all our food & drink exports, with the Republic of Ireland the top destination. It alone made up 19% of the export market with exports totalling £105m, followed by France (£83m), the Netherlands (£62m), Germany (£42m) and Spain (£37m).

In the event that no deal is agreed with the EU, both tariff and non-tariff trade barriers (such as delays or expenses due to animal health checks) will increase significantly. This would likely have the effect of reducing exports to the EU market, which could lead to price disruption in the UK domestic market. Even if a deal is agreed with the EU that includes continued zero tariff and quota access, there is still a high likelihood that non-tariff barriers would increase to some extent.

We do acknowledge that future FTAs with the rest of the world could provide opportunities for our exporters of agricultural goods and Welsh food and drink. Wales’ Food and Drink exports to the rest of the world were worth a total of £139m in 2019. This is £6m less than 2018, however £19m greater than in 2017. FTAs can make provisions to remove barriers to trade and can ultimately increase export opportunities for our sectors. However, in many cases barriers can be removed without an FTA. For example, the small ruminants rule on sheep meat in the US and the Australian beef ban prevent our producers from being able to export to these markets. The removal of these barriers is not part of the FTA negotiations and will require separate agreement.

On balance, our evidence shows that key agricultural sectors in Wales, including lamb, beef, poultry and dairy, are likely to face a disproportionate negative impact from any tariff liberalisation as a result of the UKG’s priority country negotiations. Countries such as Australia, New Zealand and the US are major agricultural exporters and have advantages from economies of scale in production. In such countries, there are also differences in production standards that could lead to cheaper costs (and afford a lower level of protection to animal and public health) when compared to the high regulatory standards in the UK. This could lead to overseas producers having an unfair competitive advantage over our own producers.

Equally concerning aspects are those of animal health and welfare, and public health: the use of antibiotic and hormone growth promoters in food producing livestock is a banned practice in the UK (and the EU). Our public and animal health is supported by a “farm to fork” traceability system enabling products of animal origin to be traced back to the farm of origin and recalled in the event of a risk to animal or human health being detected at any point in the chain. Not all potential trading partners have such a robust system in place. Imports of lower standard animals and products could have an impact on our biosecurity and international reputation. Animal health and welfare are devolved matters and a priority of the Welsh Government, as outlined in the Wales Animal Health and Welfare Framework and constitute an important contribution to the goals in the Well-Being of Future Act, such as a Resilient, Healthier and Globally Responsible Wales.

Ultimately, the degree to which future trade models will impact on our agricultural sectors will depend entirely on the market access and sanitary and phytosanitary offers made by the UK Government and the timing of any tariff liberalisation What role, if any, should the devolved administrations play in UK trade policy and how can key Welsh interests be best reflected in the UK’s trade priorities and future negotiating strategies?

Although only the UK Government has the power to conclude international agreements that bind the whole of the UK, the Welsh Government can make representations to the UK Government about those agreements given our strong interest in those agreements, particularly where they affect devolved matters. In addition, the has the power to pass laws relating to the observation and implementation of international obligations, meaning that the Welsh Government and the Senedd have a legitimate and crucial interest in the negotiation and terms of any international agreements which will require implementation.

In Trade Policy: the issues for Wales the Welsh Government set out the importance of developing deep and sustained co-operation mechanisms between the Devolved Governments and UK Government on trade. We called for the establishment of a Ministerial Forum as well as meaningful consultation and a memorandum of understanding that all could sign up to. For our part the Welsh Government committed to being a constructive partner, sharing analysis and working with the UK Government to provide leadership on stakeholder engagement.

We have since worked closely with the Department for International Trade (DIT) to develop a constructive working relationship. DIT have this year established the Ministerial Forum for Trade which we fully support. However, although working relationships with DIT remain positive these relationships have not yet been formalised through a concordat. Discussions on the concordat have been ongoing now for around two years. Despite DIT working to the spirit of the concordat it is now time to concentrate on to the substance at hand, the negotiations, and hence finalising the governance arrangements to enable us to do this is essential.

October 2020