The EU Meat Industry in a Hard Brexit Scenario CRISIS

Transcription

1 UECBV The EU Meat Industry in a Hard Brexit Scenario CRISIS

2 The European Livestock and Meat Trades Union (UECBV) is the voice of meat and ivestock professionas in Europe. As the representative of meat and ivestock trade sectors across Europe, we are constanty aert to issues and threats that may affect our members businesses, and to advocate for them when such chaenges arise. In our view, Brexit represents the greatest current threat to European producers, consumers and distributors of meat, with a potentia impact much greater than the Russian poitica embargo on EU agrifood exports. By potentiay cutting off one of the argest and highest vaue meat markets in Europe, Brexit threatens to be catastrophic for the industry across Europe and the UK. In the worst case scenario, in which no dea between the EU and the UK is agreed, the impact on the meat sector wi be monumenta, due to the particuar exposure of this sector to tariff costs, veterinary checks and increased customs and transport costs. UECBV commissioned Red Fag to undertake this anaysis and report to find out how great that impact woud be. The findings confirm our worst fears: a Hard Brexit woud send shock waves through the European meat industry, eiminating jobs, increasing consumer prices and destroying the iveihood of sma business owners working in the meat sector. The scae of this probem is too great to ignore, and we impore poicymakers to recognise the catastrophic impact of a Hard Brexit for the meat sector, to foow through on the recommendations put forward in this report, and to protect this vita European sector. Phiippe Borremans, UECBV President Contents 4-5 Executive summary Why meat wi face the highest tariffs in a Hard Brexit Scenario 6-7 Top-ine figures Biions in osses - the rea cost a Hard Brexit wi have on the meat sector 8-9 Trading in the EU The current state of meat trade The Hard Brexit Scenario Tariffs, veterinary checks, customs, WTO quotas, the Irish border and using the UK as a and-bridge Other factors affecting the meat trade Examining the hidden dangers Overa impact The shock to the European meat market a Hard Brexit woud have uecbv.eu thisisredfag.com The soution Desired negotiation outcome and mitigating measures Annex 1 & 2 and references Brusses I Washington DC I Los Angees I Dubin I London I Paris 2 3

3 Executive summary The United Kingdom wi eave the European Union on March 29, In the event of a no dea scenario, in which the UK exits the singe market and customs union without a transitionary period or trade dea in pace, trade between the UK and the EU27 wi be severey disrupted. The top-ine figures The European meat market woud be uniquey vunerabe in this situation. Meat products woud face the highest tariffs of a sectors, and woud face additiona costs, such as veterinary checks and a oss in vaue of fresh trade. UECBV commissioned Red Fag to carry out an anaysis of the potentia impact of this scenario and produce a report incuding recommendations. This report anayses how great the impact of this outcome on the meat sector woud be. It finds that the European meat sector woud be devastated by a no dea outcome, with trade coapsing and market prices faing, resuting in job osses across the EU. About UECBV The European Livestock and Meat Trades Union (UECBV) is the EU representative body for nationa federations representing the meat industry, meat traders, and ivestock traders and markets. UECBV represents nationa ivestock and meat federations in each Member States, EEA and candidate countries for EU accession, which in turn have membership comprising of 20,000 companies empoying 230,000 peope across the EU Community. The vast majority of these enterprises are sma and medium enterprises (SMEs). About Red Fag Red Fag is a speciaist strategic communications and campaigns consutancy with offices in Brusses, London, Paris, Washington DC, Los Angees and Dubin. Through its Reguatory Futures Division, Red Fag heps cients understand critica issues and their impications, map out scenarios and prepare the necessary interventions. Partnering with think-tanks, academics and other experts, Red Fag s expert anaysis informs significant decisions for major mutinationa companies and sectora organisations. Authors & editoria board Conor McGynn, Séamus Conboy, Pau Fitzsimmons, Jean-Luc Mériaux, Cormac Heay, Liz Murphy, Erik Kam We are gratefu to Professor Aan Matthews, Professor Emeritus of European Agricutura Poicy in the Department of Economics at Trinity Coege Dubin, Ireand for advice in the preparation of this report. The meat sector faces the highest tariffs of a sectors under WTO rues, with an estimated average tariff rate cose to 50% and exceeding 100% for some products. The export costs imposed by tariff barriers, customs and veterinary checks and increased transport costs woud reduce exports of meat on conservative estimates from the EU to the UK by up to 84% for beef, 48% for pigmeat and 76% for sheepmeat. This reduction in trade wi create a surpus of EU beef and pigmeat, affecting market price: this wi reduce the vaue of EU production of meat and resut in a structura reduction in EU beef market price of over 8% and pigmeat price by over 7%. This price shock woud reduce the vaue of EU production of beef by approximatey 2.4 biion in the short run, and of pigmeat by over 2.3 biion. With the potentia for EU27 beef market sef-sufficiency to dramaticay rise to 116% and a major jump in pigmeat sef-sufficiency, a Hard Brexit wi resut in significant surpus production on the interna market and the resutant wi impact a countries, even those that have imited direct trade with the UK. The magnitude of the shock of a Hard Brexit woud be significanty greater than that caused by the Russian food import ban in 2014, and it woud aso be far more difficut to find aternative markets for diverted products. The many SMEs in the meat sector woud be particuary affected by the additiona burden of veterinary and heath checks on anima products, factors not faced by many other sectors. This woud increase costs at current trade eves for EU meat exporters by over 43 miion per year. Major disruption to modern fresh meat trade fows which are underpinned by sophisticated, just-in-time ogistic systems wi create further osses for the meat sector. This scenario woud resut in the oss of at east 32,000 jobs. Recommendations Ensure a timey and sufficienty-ong transitiona period to aow businesses to adjust to the new arrangements. Reach a future trading reationship that creates a minimum burden for businesses, especiay SMEs, and maintains current arrangements as far as possibe. Ensure reguatory convergence between the UK and the EU. Impement market support mechanisms to faciitate the transition for businesses in the meat industry, incuding increasing internationa market access, introducing a simpified seaed container system, approved consignor/ consignee status for transitors, and investment in port faciities. 4 5 ➊ ➋ ➌ ➍

4 The export costs imposed by tariff barriers, veterinary checks and customs, and increased transport costs, woud reduce exports of meat on conservative estimates from the EU to the UK by up to 84% for beef, 48% for pigmeat and 76% for sheepmeat, resuting in a reduction in EU beef market price of in excess of 8%, and pigmeat price in excess of 7% the price shock wi decrease the vaue of eu production by... DOWN 2.3 BILLION Meat sector faces the HIGHEST TARIFFS of a sectors under WTO rues - avg. rate of 50% DOWN 2.4 BILLION As the European meat sector disassembes its product, and thus has to find a market for a parts of the carcass, the tariff/market price effect wi be transmitted throughout the singe market, and hence wi impact a countries, even those that have imited direct trade with the UK The tariff rate exceeds 100% for some meat products The magnitude of the shock of a Hard Brexit woud be significanty greater than that caused by the Russian food import ban in 2014, and it woud aso be far more difficut to find aternative markets for diverted products The impact of a Hard Brexit on the European meat industry A Hard Brexit scenario wi have a profoundy negative impact on the EU meat market, given the major trade fows in meat between the EU27 and the UK, the compexy intertwined nature of suppy chains and the importance of the UK as a principay deficit meat market in terms of overa market baance in the wider EU. A Hard Brexit woud resut in at east 32,000 job osses The negative impacts wi have ramifications for the beef, pigmeat and sheepmeat sectors throughout the EU. Major disruption to modern fresh meat trade fows which are underpinned by sophisticated, just-in-time ogistics systems wi create further osses for the meat sector 6 7

5 Current state of EU meat trade S ince joining the European Community in 1973, the UK has enjoyed tariff-free trade with the other EU countries, and since the Singe European Act of 1992, it has enjoyed a arge reduction in technica barriers to trade. When the UK joined the European Community in 1973, 35% of its trade was with the 12 other European Economic Area countries. This share had risen to 45% in Meat products constitute a arge quantity of this trade, with the UK being an extremey important market for EU farmers, as we as a arge producer of meat. By quantity of animas in 2015, the UK was the number three producer of bovine animas, the number two producer of poutry, and the number one producer of sheep in the EU. Meat and ivestock make up a considerabe share of UK-EU27 trade, and the UK pays a centra roe in the EU meat market, as a suppier and, more importanty, as a consumer. The UK is a significant net importer from the EU in overa terms, and the trade deficit is even greater for meat. The EU28 is currenty 102% sef-sufficient in terms of beef production, for exampe, whie without the UK, the EU27 countries woud be 116% sef-sufficient. This means that in the event of a rupture in trade, there wi be a arge excess of production in the EU27, whie there wi be a arge shortfa in the UK. Such a eve of trade disruption wi have serious market impications throughout the EU, and in the UK market. UK s share of intra-eu meat exports (beef, pigmeat and sheepmeat) Austria Begium Bugaria Cyprus Czech Repubic Germany Denmark Estonia Spain Finand France Greece Croatia Hungary Ireand Itay Lithuania Luxembourg Latvia Mata Netherands Poand Portuga Romania Sweden Sovenia Sovakia 2% 5% 1% 0% 0% 8% 25% 1% 5% 2% 7% 1% 0% 2% 56% 10% 2% 0% 1% 0% 13% 12% 8% 7% 5% 0% 0% The UK is primariy a premium market. It imports reativey higher-priced cuts of meat. Less than 20% of EU27 pigmeat exports go to the UK, for exampe, but it accounts for the majority of EU exports of higher-priced bacon. It is aso primariy a fresh market, importing more chied than frozen meat. In 2015, for exampe, the UK imported in excess of five times more chied than frozen beef. As a product, meat is aso unike other goods, where the fina consumer offerings are assembed from different constituent parts. Meat cuts and products, on the other hand, are products of a disassemby process trade is not in carcass, but in a wide range of cuts of meat. Every carcass, whether beef, pig or sheep, is dissected into an array of cuts, each with differing vaue and sod across mutipe markets and market channes in order to match suppy and demand and maximise the overa market revenue for the fu carcass. Meat trade therefore invoves a carcass-baancing eement. The UK, for exampe, imports and exports a simiar quantity of amb. However, its imports are primariy eg whie its exports are primariy carcass. Thus, trade is important for finding a market equiibrium, as it woud be impossibe for producers to extract vaue from cuts for which there is no domestic demand. The UK trades meat directy with a 27 other EU countries, to varying extents. This trade has a significant impact on the meat markets of a EU countries, even those that do not have a significant amount of direct trade with the UK, due to the transmission mechanism Source: Eurostat trade dataset DS of the Singe Market. Disruption of EU-UK The UK is an extremey important market trade woud have a significant effect on marfor EU27 meat exporters. The tabe (above centre) demonket price and production in every EU country. strates the reiance of a number of countries on the UK market, and the scae of the risk to the EU economy, with Ireand and Denmark the most exposed to the probem. UK v EU average meat price Ireand is the argest suppier of beef to the UK Begium is one of the top five suppiers of pigmeat to the UK Spain is one of the top 5 suppiers of pigmeat and sheepmeat to the UK The Netherands is one of the top 5 suppiers of beef, pigmeat and sheepmeat to the UK Denmark is the biggest suppier of pigmeat to the UK Poand is the third argest suppier of beef to the UK Germany is one of the top five suppiers of beef, pigmeat and sheepmeat to the UK France is one of the argest consumers of sheepmeat from the UK Itay is one of the top 5 suppiers of beef to the UK Source: Eurostat trade data 2015 The principa EU suppiers to the UK The UK market is one of the highest vaue markets for EU meat, and the UK beef price is one of the highest in Europe. The same argey hods true for pigmeat and sheepmeat prices. A situation in which trade with the UK was severey restricted woud therefore not ony mean a massive oss in voume of trade for the EU27, but aso a oss in high vaue trade with a sophisticated consumer market. It woud be extremey difficut to repace this oss, both in voume and vaue terms, in Europe or abroad, in the event of a rupture in trade. 9

6 The UK wi eave the EU on March 29, If, on this date, the UK drops out of the Singe Market and Customs Union with neither a trade dea nor a transition arrangement in pace, then trade between the UK and EU woud revert to Word Trade Organisation (WTO) rues. Without an agreement, both bocs woud observe the most-favoured-nation (MFN) tariff principe, which says that a country can not discriminate between other WTO members in the tariffs it charges on imported goods. The EU woud have to appy the same tariffs to UK goods as it does to the goods of other third countries,. Assuming the UK government does not take uniatera action - such as dropping a tariff barriers - and decides to maintain tariffs at the eve it currenty appies to non-eu countries, this outcome is known as the Hard Brexit Scenario. This paper assumes the worst: that the Hard Brexit Scenario comes about, with no contingency pan in pace by the EU and the UK, and no uniatera action from the UK to mitigate against the impact. ➊ Tariff costs If this resut comes about, the EU and the UK woud introduce MFN tariffs currenty evied on third countries on imports of goods. Whie the EU tariffs that woud appy to imports from the UK are known and aid down in the EU s TARIC (Integrated Tariff of the European Communities) code, the UK s MFN tariffs are not yet decided. However, they wi ikey be the same as those appied by the EU in the immediate aftermath of Brexit the UK government says that it pans to repicate our existing trade regime as far as possibe in our new schedues, and keeping the same MFN tariffs is a natura way to maintain continuity. In the Hard Brexit Scenario, the meat sector wi be disproportionatey affected by the tariffs imposed. Due to the sensitivity of the EU food market, meat products face the singe-highest average tariff rate of a sectors (see graph on page 13). Lawess and Morgenroth (2016) estimated the MFN duty rate facing different sectors in trade with the EU, and found duties on meat products to be higher than on any other product category. This eaves the sector particuary vunerabe to a WTO-stye tariff environment. A wide range of meat types or cuts woud attract a tariff up to or in excess of 100% of the product vaue, which woud render them uncompetitive and resut in major dispacement in trade fows. Even compared to food products, which as a group attract higher tariffs than manufacturing products, meat products attract much higher average tariffs. The ➋ Veterinary checks Non-EU meat and ivestock products are subject to some of the tightest and most comprehensive contros at EU borders, and can ony enter the EU through designated Border Inspection Posts (BIPs). Under EU officia contros egisation, consignments are subject to both documentary, identity and physica examinations. Sampes taken at these BIPs must be dispatched to separate aboratory faciities for further tests. In future, these officia contros on anima products wi appy to UK meat entering the EU, and simiar checks coud be maintained by the UK on products entering the market from the EU. This means a new regime of veterinary checks and restrictions woud appy on meat trade between the EU and the UK which heretofore did not exist. Scenario It coud aso introduce further imitation on the ports of entry that coud be used and major pressure on imited inspection and aboratory faciities. Evidence from third countries shows that these veterinary checks are expensive and arduous for exporters and importers, with physica inspections and off-site testing increasing wait times at borders

7 ➌ Customs contros Leaving the Customs Union wi ead to the imposition of customs formaities at the border, and increased administrative requirements for trade. This wi ead to increases in transactiona and transportation costs, caused by additiona documentation, ong deays at customs posts, as we as increased costs for the meat and ivestock industry reating to refrigeration and the maintenance of animas, empoying freight forwarders and hiring additiona ogistics staff. These costs wi disproportionatey affect sma- and medium-sized enterprises (SMEs), which constitute a arge proportion of companies in the meat sector. There wi be significant impications for production scheduing, deivery ogistics and stock eves to be carried. Average EU tariffs on food products Source: Lawess and Morgenroth ➍ Irish border 40 In the event of a Hard Brexit, and in the absence of finding new ways to faciitate frictioness trade when the UK eaves the Customs Union and Singe Market, it seems inevitabe that fu customs contros and veterinary checks wi be imposed between the EU and the UK and, as a consequence, between Ireand and Northern Ireand. This wi not aone be a major setback to the interconnected meat and ivestock business on the isand of Ireand, but it wi undermine existing suppy chains and ead to massive disruption to trade whie imposing considerabe additiona transaction costs on top of the burden of trade tariffs. ➎ The UK as a and-bridge For the two-way trade between Ireand and the other 26 EU countries and vice versa, the isand of Great Britain acts as a and-bridge for trade, and this is particuary reevant for 10 food and meat products. As we as the additiona transport costs for freight carriers in the Hard Brexit Scenario, continuing to use the and-bridge woud effectivey doube the non-tariff barriers faced by this intra-eu trade in the absence of a bonded seaed container system Meat Cereas Processed meat and fish Dairy, eggs, honey Processed fruit & veg Cocoa & chocoate Fish Veg Fruits & nuts Drinks

8 Direct cost of a Hard Brexit In the Hard Brexit Scenario, a number of factors wi impact on trade, market baance and prices of meat in the EU27 and the UK. The meat sector wi be particuary affected by: ➊ Tariffs on imports ➋ Veterinary checks ➌ Customs checks and administration ➍ Transport costs This section presents a two-stage economic mode for estimating the magnitude of the effect of these costs. First, by adapting a mode from Lawess and Morgenroth (2016), we can provide an estimate of the effect on import demand from an increase in tariff and non-tariff barriers, and hence estimate trade reductions. Second, using a partia price equiibrium mode, we can provide estimates of the effect on price of the Hard Brexit Scenario. In each of these modes we use combined average tariff rates for beef, pigmeat and sheepmeat with estimates of customs, veterinary and transport costs, which yieds a singe figure which acts in the mode ike a tariff (an ad vaorem equivaent or AVE). The methodoogy for cacuating these costs can be found in Annex 1. Economic mode #1: Effect on import demand The impact of these tariff, customs, veterinary and transport costs wi be to make it more expensive for EU producers to export to the UK, and for UK producers to export to the EU, eading to a fa in demand. How much import demand fas depends on the responsiveness of consumers and producers to the increase in the import price, known as the import easticity of demand. The Lawess and Morgenroth mode makes severa key assumptions. First, it assumes that the entire burden of tariff costs woud fa on the consumer. In reaity, the producer woud absorb some of this burden, athough the generay tight margins on meat products mean that the amount producers can absorb is imited. The mode is aso static, in that it assumes a constant demand curve. Our mode first cacuates how much both UK and EU demand fas due to the imposition of MFN tariffs and other increased costs. Cost estimates are based on a number of different studies on veterinary and customs checks. The cost of veterinary checks and transport costs are estimated to be Fa in meat trade between the EU and UK in a Hard Brexit Scenario EU to UK -84% UK to EU -90% EU to UK -76% between 2% and 5%, whie customs costs are estimated as between 5% and 8%. At current eves of trade, veterinary costs aone woud increase the tota costs for European producers exporting to the UK by in excess of 43 miion. The methodoogy for cacuating these costs can be found in Annex 1. A Hard Brexit Scenario wi devastate trade between the EU and the UK. It is important to note that these are ikey conservative estimates of the fa in trade. The scae of the change in trade in any predictive mode depends argey on how responsive producers and consumers are assumed to be to price changes. We use a conservative figure for import easticity of demand. Ceary, even in this conservative scenario the effect on trade is devastating. However, to emphasise how negativey the Hard Brexit Scenario may impact trade, in Annex 2 we present the resuts of the same mode run with a ess conservative estimate of import easticity. If import demand responsiveness is higher, trade in a meat products between the UK and the EU wi ikey be eiminated. This extreme outcome is within the bounds of possibiity in a Hard Brexit Scenario. UK to EU -53% EU to UK 4-8% UK to EU -56%

9 Effect on price Vaue of EU production of beef woud reduce by 2.4 biion We use a pared-down partia equiibrium mode to predict the effect of the estimated trade fa in beef, pigmeat and sheepmeat on price. The effect of the trade fa on EU market price wi depend on how responsive producers and consumers are to changes in price. With this in mind, we mode two scenarios: a shortrun scenario, in which producers are reativey unresponsive to a change in quantity demanded (i.e. suppy is ineastic). This refects the difficuty for producers to adjust meat suppy quicky, as it takes time to either rear more animas or to cut down the size of existing herds. We aso mode a ong-run scenario, in which producers have time to adapt production (i.e. suppy becomes more eastic). This mode assumes that trade takes pace on a stricty biatera basis, taking pace soey between the EU27 and the UK. As such, it assumes there is no rest of the word region, which in reaity woud mitigate these effects somewhat, as exports to third countries rise in ieu of ost demand. The effect of the trade fa on market price wi aso depend on the responsiveness of consumers to changes in the price they face (demand easticity). For both suppy and demand easticities we use the standard easticities found for beef and pigmeat by the FAPRI research institute. FAPRI does not ist easticities for sheepmeat, so we use the same easticities as beef. However, in the case of sheepmeat, we use a higher consumer demand easticity (doube the FAPRI estimate) for reasons which are expained in Annex 2 In monetary terms, this woud reduce the vaue of EU production of beef by approximatey 2.4 biion in the short-run, and of pigmeat by in excess of 2.3 biion (cacuated using Eurostat production vaues for catte and pig in the EU27). The combined overa vaue oss for EU meat output woud mean the oss of more than 32,000 jobs in the meat sector across the EU, disproportionatey affecting rura areas. The overa vaue oss for EU meat output woud be 32,000 jobs in the sector, most in rura areas A crucia point is that these s wi affect producers in a 27 EU countries. The singe market wi transfer the to a countries in the boc, even those that have itte direct trade in meat with the UK. The Russia Experience... The mode yieds these fina s for the three meat categories Short-run Long-run -7.3 % -4.6% Short-run Long-run 12.2% 8.8% One of the biggest shocks to the European meat sector in recent years was the ban on EU food imports imposed by Russia in The ban, imposed in response to the EU s economic sanctions on Russia for its roe in the poitica crisis in Ukraine, cut off access to a huge export market for EU meat producers. The European Pariament Research Service estimated that meat exports to Russia exposed to the ban were worth just over 1.2 biion. Tota meat exports from the EU27 to the UK, by contrast, were worth 4.3 biion in The impact on the EU meat sector in the event of the Hard Brexit Scenario, then, woud be far greater oss on EU producers than the Russian import ban. Our mode estimates a fa in exports of beef, sheepmeat and pigmeat aone to the UK far greater than the oss from trade with Russia. The osses imposed by the Russian ban were aso argey offset by rapid growth in other EU export markets in 2015, in particuar China. A simiar offsetting force for exporters in the Hard Brexit Scenario seems highy unikey. Even if new additiona markets are secured internationay, which is dependent on significant progress on market access, as discussed above, it woud be impossibe to repace a high voume, high price market ike the UK. Short-run Long-run -8.8% -5.5%

10 The oss in trade and the s due to costs arising from tariff barriers, customs checks, veterinary requirements and increased transport costs are significant. However, in the Hard Brexit Scenario there are a number of other factors at pay, not incuded in these modes, that exacerbate the price and trade effects or throw up issues of their own. These incude: Specific duties, based on weight, wi affect premium and cheaper cuts of meat differenty, distorting the market. Just-in-time and fresh trade in meat wi face particuar threats from transport deays. Exporters who use Great Britain as a and-bridge to export goods from mainand Europe to Ireand and vice versa are particuary vunerabe to cost increases. Other factors affecting meat trade 1 Different categories of meat 2 Fresh & just-in-time trade 3 The UK as a and-bridge One of the main eements not accounted for in the modes on the previous pages is the different effects a Hard Brexit Scenario woud have on different cuts of meat. This is especiay true for beef, on which there is itte differentiation in tariffs appied to different vaue cuts. Since there are significant disparities in the price consumers are wiing to pay for different cuts and categories of meat, it foows that certain produce wi be disproportionatey impacted. Specific duties (tariffs based on weight) particuary affect higher- and ower-quaity cuts differenty. For exampe, the EU has a MFN specific duty of 12.8%+ 3,034 per tonne of boneess fresh or chied beef. Taking approximate prices for manufacturing beef and stripoin, the price per tonne of manufacturing beef is approximatey 3,500, whie the UK price per tonne of stripoin is approximatey 13,000. The price of manufacturing beef wi increase by amost 100% This means that, after the specific duty is appied, the price of stripoin wi increase by approximatey 36% to 17,698. The price of manufacturing beef, however, wi increase by just under 100% to 6,982, a much arger proportiona increase. This means that exporters of the cheaper cuts of meat wi be disproportionatey affected by the introduction of MFN tariffs. The same is true for expensive cuts of pigmeat, such as bacon, which wi have a smaer reative price rise than cheaper cuts. The disassemby of animas into different cuts of meat aso creates issues of carcass baance that are not captured by The price of stripoin wi increase by 36% the mode. Cuts require to be sod across many markets and market segments. Trade between the UK and the EU27 pays an important baancing roe in this regard. The exampe of sheepmeat trade has aready been given, and the same appies to beef and aso pigmeat where trade with the UK in certain cuts is far greater than in others. Denmark, for exampe, sends ess than 20% of its pigmeat exports to UK. For bacon products however, which are higher price cuts, the UK takes 82% of the tota Danish export in vaue terms. A breakdown in trade disrupts the carcass baance, causing greater osses than predicted by the mode. Increased transit times wi disproportionatey affect time-sensitive industries and ogistic systems such as the fresh meat sector, reducing shef-ife and potentiay increasing spoiage. Meat products with a shorter shefife (poutry and pork) woud be particuary affected. The UK is predominanty an importer of fresh rather than frozen meat products, and wi hence be especiay sensitive to increases in transit times. Furthermore, due to particuar reguatory conditions aid down for certain meat products (e.g. fresh minced beef must be produced from carcasses within six days of saughter) existing fresh trade may be forced to revert to a frozen business, which aso impacts on price and consumer choice. Just-in-time deivery is an inventory management strategy for retaiers whereby they seek to receive stocks as they need to se them, rather than storing stock themseves. It is particuary used for fresh products such as meat. Supermarkets which have predominanty removed their in-store butchery capabiity do not want to hod arge amounts in case of spoiage. Instead, they order goods as they are needed, for exampe using next-day deivery. This sort of trade wi obviousy be affected by increases in costs, as retaiers are forced to hod more stocks and pan deiveries of imported goods further in advance. A very sophisticated ogistics system which has been deveoped over years wi be severey undermined. With the UK outside the Singe Market and Customs Union, transiting the UK as a and-bridge for trade within in the EU27 - the two-way fow of product between Ireand and the other 26 EU countries - woud become extremey probematic and, at a minimum, highy bureaucratic. More than 90% of Irish meat exports to continenta Europe fow via the and-bridge through the UK, due to the cost effectiveness and speed of this transit route compared to, for exampe, the sea route direct to France. Transit using the and-bridge from Ireand to Caais takes an average of 10.5 hours, compared to 20 hours by sea to the port of Cherbourg in northern France, or at east 38 hours to the port of Zeebrugge in Begium. The increased transport and customs costs woud be compounded for freighters using the and-bridge, as goods transiting woud be subject to two customs checks (entering and eaving the UK) rather than one. This doube-check coud be avoided or minimised through the use of a bonded seaed container system for transiting the UK. However, this woud impose groupage costs - expenses arising from transporting goods in a container at ess than fu oad - as currenty many freighters drop off and pick up goods in the UK whie traveing to mainand Europe or Ireand. Pubic and private administration costs associated with the trade woud aso increase. The importance of the and-bridge for Irish exporters means that in the Hard Brexit Scenario the cost for Irish exporters to the rest of the EU26 is ikey to increase. Likewise, exporters of meat or other anima products from the other EU26 countries to Ireand woud face an increase in cost. This curtais the abiity of EU producers to offset their osses by increasing trade within the EU27 boc

11 This anaysis suggests that, if a Hard Brexit Scenario comes about without mitigating action, the resut wi be a massive shock to the entire European meat market, with hundreds of miions in ost revenue, thousands of job osses at farm and processing eve, and a devastating suppy and demand mismatch. The inevitabe reduction in trade wi eave many EU countries with a considerabe surpus production of meat, whie the UK wi face a shortfa in suppy. Since the production ead-time in this sector is both ong and fixed (rearing of animas), surpus production can not be avoided with an immediate change in production patterns, so the issue of surpuses wi inevitaby arise in the immediate aftermath of a Hard Brexit. This mismatch wi change the trading patterns of both parties, and generate significant production surpuses which must be reaocated. This wi have knockon impications for pricing, consumption and future production. This section wi provide a quaitative anaysis of what may happen to meat trade patterns in both the UK and EU27 in the wake of a Hard Brexit. Overa impact of a Hard Brexit The EU27 probem: Excess production Overa, the EU27 is a net exporter of meat to the UK (athough it is a net importer of sheep meat). In the event of the Hard Brexit Scenario, the fa in trade with the UK wi mean the EU27 wi be eft with a arge surpus of meat products, eading to a fa in the price of most meat products, as outined in the previous pages. It is difficut to assess what may happen to surpus meat production in the EU27, due to the compex and mutifaceted nature of the Singe Market, and the difficuty in projecting consumer behaviour, production patterns or future third country trade in such unprecedented circumstances. However, there are indications of how the reaocation may go. The main effects are ikey to be: ➊ Shifts in consumer behaviour ➋ Increase in third country exports ➌ Change in production after an initia period ➍ Significant fa in beef and pigmeat prices Consumers preferences may shift towards reativey cheaper meat products - such as pigmeat and poutry - and away from reativey more expensive meat ike beef and amb. The surpus European suppy is aso ikey to resut in an increased requirement for exports of meat products to third countries, the markets of which are overwhemingy ikey to be ower-priced markets than the UK, making it difficut to reaocate more expensive cuts or achieve an overa carcass vaue simiar to that when the UK market was in the mix. Furthermore, it takes time to increase trade with third countries, due to existing market access constraints, particuary for Asian markets where demand is growing. After the Russian food import ban, the European agricutura sector was ony saved from crisis by a arge increase in trade with China. It is extremey unikey that a simiar market wi open up in the wake of Brexit. Any reaocation to externa markets wi ikey take many years to come about. Other (pigmeat and beef) 44.22% South Korea (pigmeat & beef).05% Vietnam (pigmeat & beef).02% Phiippines (pigmeat & beef).05% China (pigmeat) 27.84% Japan (pigmeat) 13.31% Lebanon (beef) 1.79% Israe (beef) 1.87% Turkey (beef) 4.17% In 2016, the EU exported 2.2 biion in beef and 7.8 biion in pigmeat products to third countries. The main destination for EU red meat exports were China and Japan. Suppy of meat is reativey ineastic in the short-run, as it often takes a number of years to change suppy. This is what makes the price impact in the short-run greater than in the ong, and exacerbates the shock to the market. In the ong-run, however, suppy of beef and pigmeat wi ikey fa, which wi mean oss of jobs, especiay in rura areas, as we as a fa in economic activity. Without a repacement market, EU meat production wi fa to a permanenty depressed eve, with fewer peope empoyed and ess economic activity generated. The effect of the Hard Brexit Scenario on the EU meat industry wi be severe and difficut to reverse. It woud be devastating for jobs, growth and production in the industry across the EU

12 ➊ Transition period to provide greater business certainty and avoid ciff-edge Long-term trade arrangements that mitigate the harshest trade effects of Brexit wi take time to impement. This is why ensuring there is a transition period, during which time businesses can adapt to new arrangements, is an important part of the reguatory approach to Brexit. There is now an urgency for confirmation of a transition period in order to give some business certainty. The transition period shoud maintain current trade arrangements as far as possibe, in order to ensure continuity of tariff-free trade, reguatory and export process for businesses. ➋ Future trade partnership The desired outcome of the negotiations is that the future trade reationship between the EU27 and the UK woud preserve existing trading conditions. A resut in which current arrangements were preserved as cosey as possibe woud greaty benefit the EU and UK meat sectors. Apart from avoiding the disastrous impact of tariffs, this woud aso avoid the disruption associated with customs and veterinary contro checks. Cruciay for the meat industry, maintaining the current arrangements of the Singe Market woud mean no additiona costs stemming from veterinary and heath checks. Fu iberaisation is the singe-most effective way of avoiding the worst effects of a Hard Brexit. Due to the particuar impact customs checks wi have on the meat industry - due to the impact of deays on perishabe goods - preserving current customs arrangements as far as possibe is vitay important. However, it is important to note that maintaining the structures of the customs union aone wi not avoid veterinary checks for products or the need for importers to obtain a Singe Administrative Document, and hence wi ony partiay mitigate against damage to the industry. Mitigating toos for addressing burdensome customs procedures and transactiona costs are considered beow. ➌ Reguatory convergence - equivaence agreement Market support measures to address the immediate surpus in meat suppy in the event of a Hard Brexit Soution the The shock of the Hard Brexit Scenario wi seriousy impact meat trade with the UK, and have significant negative impications for the entire EU meat sector. How to prevent a meat trade crisis EU and determination of the future trading reationship between the UK and EU27, the EU meat sector can highight the massive impications such a fracture of the singe market wi have. The negative impact of this shock can be at east somewhat offset by ensuring the right poicy measures are in pace. These incude the four steps identified beow... Urgenty increase internationa market access for companies The oss of the UK market in the Hard Brexit Scenario woud be devastating for EU meat producers. Whie it is unikey that the UK market coud be repaced, due to its uniquey high vaue, it is urgenty important for the EU to ook for aternative markets internationay. Opening up new third country markets woud hep to mitigate the shock of the UK s exit, and dampen job oss and s. Simpified seaed container system Introducing a seaed container system - whereby containers transiting across the and-bridge between Ireand and mainand Europe woud be officiay seaed - woud avoid the need for separate customs checks entering and exiting the UK. Whie a seaed container system is envisaged in EU reguation, a simpified system, which reduces burdensome reguations, woud best suit the Hard Brexit Scenario. However, this woud sti disrupt current trade patterns, incuding increasing groupage costs for operators, or making groupage inoperabe. Mutua recognition and Approved Consignor/Consignee status Mutua recognition of standards woud expedite trade between Approved Consignors/Consignees, a status given to importers and exporters who then benefit from a more streamined customs procedure. Having this status means operators undergo fewer safety and security checks. Ensuring companies trading with or transiting through the UK have Approved Consignor/ Consignee status is key to reducing administrative costs of customs checks. This is particuary important for SMEs, who wi be most impacted by the cost of checks. Investment in port faciities In the absence of the UK remaining in the Singe In the event that the UK eaves the Singe Market, the The sector urges the EU authorities and UK government to avoid any ciff-edge exit, and to give and in the EU wi be essentia in order to accommodate Investment in port faciities by both the UK government Market, negative impications arise for the EU negative impications of differing standards and the imposition of veterinary checks can be minimised through meat sector, which wi be most extreme in the businesses the certainty they need to pan for their customs and officia contros checks whie aso minimising deays to product transport. It is essentia that ensuring a bespoke equivaence agreement on vet standards, grounded on the maintenance of the EU Acqui preparations of ports begin ahead of time, in order to context of a Hard Brexit. futures, preserving present trading arrangements Whie fuy recognising the compexity of negotiations of the withdrawa of the UK from the tions, UECBV cas for the steps outined here... as far as possibe. In terms of these negotia- Communataire. protect against a possibe Hard Brexit outcome Step 1 Step 2 Step 3 Step 4

13 annex 1 & 2 costs, trade, price modes 24 25

14 Cacuating the direct costs... ➊ wto tariff costs The EU s MFN tariffs for meat products incude both ad vaorem tariffs, charged on the vaue of imports, and specific duties, charged based on weight. In order to cacuate the tota tariff burden for the modes, specific duties must be converted into percentages, yieding an ad vaorem equivaent (AVE) tariff which is combined with the ad vaorem tariff. This data comes from the WTO database. ➋ veterinary checks Whie customs checks are common to a categories of goods under the Hard Brexit Scenario, the meat and ivestock sector wi aso be affected by veterinary checks. Live animas and products of anima origin are deemed by the EU to present a high eve of risk, and so are subject to more stringent import requirements than other products, such as mandatory channeing of products to border contro entities, known as Veterinary Border Inspection Posts (BIPs), where they are subject to mandatory product checks. These checks are expensive and take time for both exporters and importers, and woud further push up trade barriers between the EU and UK. Any import of ive animas or anima products from third countries can ony enter the EU if it has undergone and passed the Sanitary and Phytosanitary checks set out in EU Directive 97/78/EC, and has been issued a Common Veter- Cost of vet checks and port cearance for exporters to the EU wi be approx. 635 per consignment inary Entry Document (CVED) by the Trade Contro and Expert System (TRACES). TRACES is an EU database which aows for monitoring of shipments of ive animas and anima products checked at the BIPs. In the event that the UK imposes these checks on EU imports, and ikewise the EU maintains its checks, this wi add significanty to the cost of trade in animas and anima products between the EU27 and UK. The combined cost of veterinary checks and port cearance for exporters to the EU from third countries is estimated to be over 625 per consignment. ➌ customs costs In the Hard Brexit Scenario customs contros wi be an unavoidabe reaity. Third countries outside the Customs Union are required to provide a range of documents and decarations to compy with the Singe Administrative Document, the passport required for exporters to bring goods into the EU. These incude: Certificate of origin: to compy with EU Rues of Origin and show that correct duties have been paid. Transit permit: required by exporters from third countries without a transit agreement. Commercia invoice: required for cacuation of tariffs and customs decaration. Security certificates: to prove the safety of imported goods. Freight documentation: for hauage and shipping. VAT certification: uness a country has an agreement with the EU on VAT, additiona documents are needed. Customs vauation document: to cacuate customs duties owed at the border. Paper import icences. Such customs contros wi be common to a categories of goods transiting between the EU27 and UK, and wi not on their own create a significant additiona burden on the meat sector reative to other sectors (veterinary checks, additiona time and transit costs, and the impact on fresh and just-in-time produce are considered). Whie product eve estimates for customs costs are not avaiabe, UECBV cacuated customs costs of 5-8% for meat products. These estimates are based on actua costs at the point of export and import, but do not take into account factors such as increased costs from additiona ogistics staff and product devauation as a resut of deays, and are therefore ikey conservative estimates of the fu costs. Customs costs on meat products coud be up to 8% annex 1 ➍ increased time & transit In the event of customs and veterinary checks being imposed at borders, wait times for freight carriers transporting goods between the EU27 and UK wi increase. This wi mean an increase in transit costs for suppiers. Meat woud be substantiay affected by the increase in transit time affected reative to other categories of goods, as the necessary refrigeration or freezing of meat products adds to transit costs. Documents checks at borders woud increase wait times by an estimated three hours, whie inspections woud add an extra five. A deayed driver with a refrigerated truck at a border crossing costs approximatey 550 ( 500) per day. This yieds an estimated cost increase of 183 per consignment. At an estimated average weight per consignment of 20 tonnes, this wi increase cost per tonne by approximatey 21. Combined with the cost of vet checks, this woud mean a percentage increase of between 2% and 5% for meat products. These are ikey conservative estimates for transport costs. Wait times may be onger; truck drivers entering the EU from Turkey, for exampe, can wait for up to 30 hours. For cargo eft in port, the cost of deays are even higher due to demurrage: charges from port operators to ships that go beyond their aocated time in oading and unoading their cargo. Daiy demurrage rates at UK ports in 2013 cost up to 110 per day, pus a further 60 to 110 in additiona charges typicay kicking-in after three to five days. It aso does not incude cost estimates for spoiage of fresh food in the event of a deay. A of these factors woud push up transit costs for firms. A deayed driver with a refrigerated truck at a border crossing costs approximatey per day

15 annex 2 Meat trade & price mode trade mode The mode assessing the impact of increased tariff and non-tariff costs on trade fows is based on a mode from Lawess and Morgenroth (2016), in which the authors assess the sectora eve impact of WTO MFN tariffs on EU-UK trade in the event of a Hard Brexit. The mode is static, and estimates how much demand for imports of meat products fas in the event of consumers facing a higher tariff price. The mode uses trade data from 2016, coected from the European Commission s Eurostat database (DS ). It wi incude exports from each of the EU27 countries to the UK, and exports from the UK to each of the EU27 countries. The Eurostat database ists trade in goods according to the Harmonised System nomencature. The mode focuses on the second category of goods, HS02 Meat and Edibe Meat Offa. Foowing Lawess and Morgenroth we anayse trade at the HS 6 digit eve for beef, pigmeat, and sheepmeat, in the foowing HS 4 digit categories: HS Meat of bovine animas, fresh or chied HS Meat of bovine animas, frozen HS Meat of swine, fresh, chied or frozen HS Meat of sheep or goats, fresh, chied or frozen HS Edibe offa of bovine animas, swine, sheep and goats HS Meat and edibe offa, sated, in brine, dried or smoked HS Prepared or preserved meat, offa or bood Meat of sheep and goats are treated together in order to maintain consistency between the HS product categories, and referred to as simpy sheepmeat due to the reativey sma amounts of goat meat traded in the EU. Animas fats are excuded, due to the nomencature not giving a sufficienty fine-grained breakdown of these product categories. The import easticity of demand comes from Ghodsi et a. (2016). This paper gives country-eve estimates of import easticities for a countries wordwide. We chose this paper as our source for easticities as it gives different easticities for agri-food and manufacturing goods. Using this easticity measure rather than an aggregate measure contributes to the expanatory power of the mode, as the demand for these groups of products often have a different responsiveness to price changes. The tariff data comes from the Word Bank database of the EU s schedue of WTO MFN tariffs. As these tariffs consist of both ad vaorum and specific duties, a combined AVE is cacuated for each of HS 6 digit product category. Customs costs are estimated from a range of sources as being between 5% and 8%. A median vaue of 6.5% is used for each product. Veterinary and transport costs are estimated and appied at the product eve, and ie in a range of between 2% and 5% depending on the vaue of meat to which the cost is appied. price mode We use a partia equiibrium mode for estimating the effect on market price in the Hard Brexit Scenario. The key assumption is that there is no rest of word in the mode. As noted in the report, in reaity the trade and s woud be offset by an increase in trade with third countries, a possibiity which is not aowed for in this mode. The s generated shoud therefore be seen as a worst-case scenario, offset by whatever extent trade increases with third countries. By treating the EU27 as one boc the mode aso assumes a common price within the boc; the shoud therefore be interpreted as the aggregate effect on prices in the EU. The mode has two regions, the EU27 and the UK, each of which produces a certain amount of beef, pigmeat and sheepmeat. Suppy is given by Eurostat figures for saughterings in 2015, and net exports are given by Eurostat trade statistics for The difference between these two figures gives a figure for demand in the UK and the EU in each of the three goods: S EU - NX EU = D EU S UK - NX UK = D UK We use high and ow estimates of suppy and demand easticities to generate s in each scenario. For the reasons expained in the paper the effect on EU market price is not greaty affected by changes in suppy or demand easticity, athough net trade fows are significanty impacted. The suppy and demand equations are therefore given by: Qx = ap a The word market is in equiibrium: the sum of the suppy and demand equations is equa to zero. high import easticity of demand scenario As mentioned in the paper, the trade mode uses a reativey conservative estimate of import easticity of demand. Using a high easticity vaue resuts in an even higher drop in trade. Lawess and Morgenroth themseves use easticity vaues from Imbs and Mejean (2016), who estimate import easticities for a wide variety of sectors. Their easticity vaue for food is estimated to be Using this vaue in our mode, trade in a meat goods goes to zero in the Hard Brexit Scenario, and the s generated are higher. As noted in the report, whie this resut is extreme it is certainy within the bounds of possibiities. When faced with such arge increases in price for imported meat, consumers may simpy turn to other domestic meat or non-meat products as aternatives. This creates disequiibrium in the word market; prices must adjust to restore equiibrium. In the mode we use the Exce Sover too to sove for the new price, which provides us with the price change in the EU market. As the UK is a net importer of beef and pigmeat, the EU market price of these products wi drop, whie as the UK is a net exporter of sheepmeat, the EU market price wi rise (as the mode assumes no increased import from non-eu origin). The initia resuts show a very arge increase in sheepmeat price in the EU, of over 20%. This arge, however, is ikey an overestimation of the true effect for two reasons. First, estimations of price easticity of demand are based on sma incrementa changes in price. The size of the price shock in this case, however, is much arger. Consumers response to a price shock of this magnitude can not be captured simpy by ooking at how they respond to reativey much smaer price changes. With such a arge price change, peope are much more ikey to switch to an aternative meat or reduce the quantities of meat they purchase. Short-run Long-run 21% 16% Short-run Short-run Long-run -7.5 % -4.7% Long-run -8.3% -5.2% The second reason is that price easticities of demand are estimated assuming the prices of competing products remain constant. However, in the case of Brexit there woud be significant fas in the price of beef and pork, which are reativey cose substitutes for sheepmeat. Thus, couping the rise in sheepmeat price with a fa in the price of substitute goods woud ikey resut in a much arger demand response than is given by conventiona easticities. As the share of sheepmeat of tota EU meat consumption is reativey sma the reverse effect of sheepmeat on the demand for other meat products is ikey quite sma, and we wi hence disregard it here. For these reasons we use a price easticity of demand for sheepmeat that is two times the FAPRI estimate. Again it shoud be noted that the figure for sheepmeat, due to its being a net import good in the EU, is ikey overestimated in this mode. It coud be expected that a resutant deficit in sheepmeat Once tariffs are introduced the equaity becomes: suppy in the event of a Hard Brexit woud ead to additiona Qx = a(1+t)p a non-eu imports