Brexit: Impacts on UK & EU Agriculture Policy & Trade

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1 Agra Europe Agribusiness intelligence Brexit: Impacts on UK & EU Agriculture Policy & Trade

2 Brexit: Impacts on UK and EU Agriculture Policy and Trade Contents Contents Disclaimer... 4 Introduction Exiting the EU Politics of withdrawal Britain s approach The EU s approach Trade policy options for the UK outside the EU The Norway model The Switzerland model The Turkey model The Canada option Operating on World Trade Organisation rules Conclusion? The process of withdrawal from the EU The withdrawal agreement Release of EU obligations on withdrawal UK withdrawal procedure Questions on trade Existing trade deals Climate policy ramifications? Future questions? The process of withdrawal Process of withdrawal for agriculture Process of withdrawal for trade in food and agriculture The UK s alternative agriculture and food policy The problem of farm incomes UK farm incomes without subsidy Impact of removal of DP on cereal farms Impact of DP removal on General Cropping Farms Impact of DP removal on Dairy farms Impact of DP removal on Lowland Grazing Farms Less Favoured Area grazing farms Deregulation and innovation Risk management approach Brexit Analysis 2016 Informa Agribusiness Intelligence 1

3 Contents Brexit: Impacts on UK and EU Agriculture Policy and Trade 5. The UK s post-2020 agricultural trade policy EEA membership Customs Union The Canada option Trading on the WTO basis Conclusion on future trade arrangements Negotiating new trade policies The choices Trading on a WTO only basis? Negotiating FTAs Impact on EU external trade policy The UK s negotiations outside the EU Impact of Brexit on the UK s agricultural trade with EU countries Impact on CAP development Impact on CAP Budget Impact of Brexit on Netherlands The agricultural trade impact on the Netherlands Impact of Brexit on Ireland The agricultural trade impact on Ireland Impact of Brexit on Denmark The agricultural trade impact on Denmark Implications for agri-food trade with Commonwealth countries Australia New Zealand Canada Agricultural trade Tariff elimination India Conclusions Brexit Analysis 2016 Informa Agribusiness Intelligence

4 Brexit: Impacts on UK and EU Agriculture Policy and Trade Contents Figures & Tables Figure 2.1 What are the viable trade options? Figure 4.1 Average UK farm incomes by category ( ) Figure 4.2 Importance of Direct Payments in Farm Business Income (% of total FBI) Figure 4.3 Components of farm income by category Figure 4.4 Impact of removal of Direct Payments on cereal farms Figure 4.5 Impact of removal of Direct Payments on General Cropping Farms Figure 4.6 Impact of removal of Direct Payments on dairy farms Figure 4.7 Impact of removal of Direct Payments on lowland grazing farms Figure 4.8 Impact of Direct Payment removal on LFA grazing farms Figure 7.1: UK agriculture trade with the EU Figure 7.2: Leading UK agricultural export products and markets (, 2015) Figure 7.3: EU Member States ranked by exposure to Brexit Figure 7.4: Impact of Brexit on CAP net balances ( m, based on 2015 CAP year) Figure 7.5 Value of Netherlands Agri-Food Exports to UK ( ) by product category and % of UK Market Share vs Total Exports Figure 7.6: Market Distribution of Irish Food and Drink Exports (%) Figure 7.7 Value of Ireland Agri-Food Exports to UK ( ) by product category and % of UK Market Share vs Total Exports Figure 7.8: Danish pigmeat exports in ( , excluding offal) Figure 7.9 Value of Denmark Agri-Food Exports to UK ( ) by product category and % of UK Market Share vs Total Exports Figure 8.1 Australian agriculture and food exports to the UK Figure 8.2 Bound and applied tariffs on trade in agriculture and food products Figure 8.3 New Zealand Beef and Veal Exports (tonnes) Figure 8.4 EU Quota Utilisation by New Zealand & Australia Figure 8.5 EU High Quality Beef Quota Allocation 2015/ Table 2.1 Pros and Cons of Trade Options for the UK outside of the EU Table 5.1: EU ad valorem import duties for agriculture and food products, by product group, Table 7.1: Brexit simulation results, main scenarios, export values, percentage changes with respect to the baseline in Table 8.1 UK share of New Zealand Food & Agriculture exports, Table 8.2 Canada-UK agri-food trade (C$m) Table 8.3 Top 5 Canadian agri-food product exports to UK (C$m) Table 8.4 Top 5 UK agri-food product exports to Canada (C$m) Table 8.5 Canada-EU agri-food trade (C$m) Table 8.6 Top 5 Canadian agri-food product exports to EU (C$m) Table 8.7 Top 5 EU agri-food product exports to Canada (C$m) Brexit Analysis 2016 Informa Agribusiness Intelligence 3

5 Brexit: Impacts on UK and EU Agriculture Policy and Trade Introduction Introduction Let us go in together, And still your fingers on your lips, I pray. The time is out of joint O cursèd spite, That ever I was born to set it right! Nay, come, let's go together. Hamlet Act 1, scene 5 In the aftermath of the referendum on UK membership of the European Union, only one thing is clear for the future of the agriculture and food industries of the country: all of the options now available for UK agriculture and food and agriculture trading relationships will be worse than current membership arrangements. This applies to both trade with the EU countries and those outside the Union. They will also be highly disadvantageous to the food and agriculture industries of the Irish Republic, Denmark and the Netherlands. In addition, the UK agriculture industry will have to get used to receiving a much lower level of state support. What the agri-food industries of the UK now have to grapple with is the uncertainty of when and how their cross-channel trading relationships will be disrupted and redirected, the terms on which they will eventually be trading with their existing customers, how far the UK Government will be able to negotiate new preferential trade relationships with non-eu countries and trading blocs and what will be the eventual impact on the industry s production, costs and incomes. Given that the bulk of British agri-food exports currently go to the EU, it is the eventual trading relationship established with the EU single market that is of prime importance. The best option (ie. second best to full membership) would be an arrangement within EFTA/EEA. Under present rules this avoids any commitment to operation of the CAP, but does allow access to the Single Market. Its major disadvantage for the agriculture industry is that it allows the UK to operate its own agriculture policy. Such a policy, dictated by the Whitehall Treasury, would be significantly more stringent than the European policy. What there need be little doubt about is that UK farmers income would be substantially reduced, many small- and medium-sized farms would go out of business, farms would get larger and the rural social structure and the environment would be seriously damaged. There is also the issue of continued financing of rural structural and regional policies. Will the post-brexit Government continue to finance these on the current bases and at current levels? There are also important technical and scientific aspects. Apart from the continuation of state financing of agricultural research, projects issues such as a more liberal approach to genetically modified crops and pesticides regulation will have to be addressed. Brexit Analysis 2016 Informa Agribusiness Intelligence 5

6 Brexit: Impacts on UK and EU Agriculture Policy and Trade Chapter 5 5. The UK s post-2020 agricultural trade policy The second, immediate post-referendum phase will be about what sort of association Britain should have with the EU. The UK government would have to negotiate the details of the withdrawal treaty with the rest of the EU member states. It is likely that other member states would demand that, if Britain wanted full access to goods, services, public procurement and financial markets, it would have to become a member of the EEA. Business leaders would put pressure on the government to do so, since they do not want trade barriers to go up with the rest of Europe. This outcome is however unlikely because it does not fulfil the promises made by the exit campaigners prior to the referendum. The Eurosceptic lobby would then be likely to concentrate their energies onto demanding a bespoke free trade agreement, without free movement or budget contributions. And since immigration, sovereignty and the EU budget are the main reasons for British hostility to the EU, it is hard to see how the government could accept the EEA option. The Eurosceptic demand for a free trade agreement, though generally popular in the UK, would be strongly opposed in the rest of Europe. Ultimately, the UK could find itself going it alone and having to face trading with the EU only on a mostfavoured nation (MFN) basis. A large part of the export-oriented UK food industry, while being able to import its raw materials more cheaply, would find itself facing high tariff barriers if it intended to maintain its trade with the European mainland. Canada's free trade deal with the EU, the Comprehensive Economic and Trade Agreement (CETA), is seen by some as a better model for the UK than the EU's often-cited trade arrangements with Norway and Switzerland. Seen from the anti-eu position, Norway and Switzerland pay a high price for their access to the EU single market: they sign up to most EU regulations, accept free movement of EU workers and make payments into the EU budget. CETA will give Canada preferential access to the EU single market without all the obligations that Norway and Switzerland face. According to Conservative MP David Davis, CETA "would be a perfectly good starting point for our discussions with the Commission". The UK would however have to negotiate a better deal than CETA, because of its considerable shortcomings. Four alternative post-brexit trade policies Given that the current UK Government s prescription for the new trading relationship with the EU and the rest of the world has three main pillars: i) control over immigration policy; ii) control over law making and iii) no compulsory contributions to the EU budget, it has to be a looser arrangement than the current close involvement in the Single Market. Brexit Analysis 2016 Informa Agribusiness Intelligence 37

7 Chapter 5 Brexit: Impacts on UK and EU Agriculture Policy and Trade These guiding principles indicate that the UK cannot possibly be a full member of the European Union's single market, or of the European Economic Area (without modified terms). A Swiss-style status of quasi single-market membership is excluded on the same basis. 5.1 EEA membership Unmodified UK membership of the Economic Area would be unlikely to suit the UK Government, since it enshrines all those things which they want curtailed if they are to remain within the Union. The EEA Agreement extends the EU single market and free movement of goods, services, people and capital, together with laws in areas such as employment, consumer protection, environmental policy and competition to its members. The disadvantage to the UK s post-brexit Government is that it would retain not only the maintenance of free movement of labour which most irritates the anti-eu faction, but also the vast majority of the EU regulations deemed by UK critics as most burdensome to businesses such as the European Working Time Directive. Not only would these still apply if the UK remained a member of the EEA, but it would also be bound by future EU law in these areas, with less influence over their content. Liechtenstein, Norway and Iceland have no representation in any of the EU institutions and only indirect influence including the right to be consulted on EU proposals affecting them. The only basis on which the UK would be prepared to consider the EEA membership option would be if a special agreement were to be concluded on the free movement of labour. This is unlikely to be agreed by a majority of the EU-27. Were such an agreement to be achieved however, the basis of food and agriculture trade between the UK and the EU27 would remain largely unchanged. There would also be no change in the UK s trading relationships with the non-eu countries with whom the EU has free trade agreements. 5.2 Customs Union The members of a customs union (CU) fix a Common External Tariff (CET), and once this tariff has been paid imports from third countries are in free circulation and as with products originating within the union can move freely from one member state to another. From a trade perspective possibly the least disruptive option would be for the UK to withdraw from the EU, but retain the CU. This has the advantage that existing tariff arrangements, both with EU member states and with third countries, would be maintained and there would be no need to renegotiate tariffs and concessions within the WTO. (This would not stop the members of a CU from restricting the import of agricultural products on legitimate health/environmental grounds.) If agriculture was included as part of this deal it would be relatively easy to negotiate a good outcome for British food and farm exports. Such a deal would also likely to be more acceptable to other members of the WTO Brexit Analysis 2016 Informa Agribusiness Intelligence

8 Brexit: Impacts on UK and EU Agriculture Policy and Trade Chapter 5 Switzerland, which has a CU with the EU, is in EFTA but not the EEA and has been suggested as an example of what the UK s new trade arrangement could be. EFTA is a free trade area rather than a CU. The UK was one of the original members. Switzerland has a series of bilateral treaties or contracts with the EU negotiated on a case-by-case basis. There are 20 important agreements and 100 that are less so. Bilateral I signed in 1999 included an agreement on agriculture and Bilateral II signed in 2004 included an agreement on processed agricultural products. It should be noted that Switzerland provides a higher level of domestic agricultural support than the EU. As in the case of Norway, this reflects the particular challenges that agriculture faces in terms of terrain and climate. Switzerland is more integrated than Norway into the EU because of geography, but lags behind Norway in terms of legal arrangements and the scope of its access to the single market. If the UK attempted to withdraw on a Swiss-style arrangement, the EU would be likely to insist on wholesale UK adoption of future single market legislation and on UK acceptance of surveillance and enforcement mechanisms. In a 2012 report the House of Commons Foreign Affairs Committee stated: We agree with the Government that the current arrangements for relations with the EU which are maintained by Norway, as a member of the European Economic Area, or Switzerland, would not be appropriate for the UK if it were to leave the EU. In both cases the non-eu country is obliged to adopt some or all of the body of EU Single Market law with no effective power to shape it. 5.3 The Canada option Those now in charge of the UK s future trading relationships with the EU and non-eu countries appear to favour an agreement similar to the currently negotiated Canada-EU Free Trade Agreement (CETA). Similar is the key word here, since there are many important aspects in which the UK s position vis a vis Europe differs from that of Canada. This preference for a Canada style agreement raises several questions, most obviously: why the UK should aim for a trade arrangement that so obviously would reduce its current market access and increase the cost of trading with Europe? CETA may improve Canada s market access in Europe, but it certainly would reduce the UK s. On the broad trade front, a CETA sort of arrangement would seriously reduce actual market access for the UK s financial sector. Furthermore, outside the single market, Britain will lose its current protection against regulation discriminating against UK providers of financial services because of their origin. More specifically, UK firms, particularly those in the agri-food sectors, form part of dense production networks and regional value chains involving many companies in different parts of Europe. British firms link up with European firms in a far more integrated manner than Canadian firms, and their integration goes far beyond trade in finished goods and services. Brexit Analysis 2016 Informa Agribusiness Intelligence 39

9 Chapter 5 Brexit: Impacts on UK and EU Agriculture Policy and Trade A CETA style agreement would not give Britain the deep market integration it needs. The UK has a much wider pattern of trade with the EU than does Canada, this applies particularly to the food and agriculture sectors. While Canada has only sought better access for a few agricultural products, the UK would be seeking to maintain access for all of its current products, unhampered by what could be considerable tariff thresholds (see below) and non-tariff barriers. Given that most MFN tariffs are now relatively small, it is the peak tariffs that matter. These are unfortunately concentrated in the agriculture and food sectors. Most industrial products have so low tariffs that they don t serve as protection against foreign competition; the trade weighted duty level in Canada-EU trade, for instance, is only 2%. But the peak tariffs are important and CETA can only be worthwhile if the two parties have agreed to eliminate the peak tariffs on goods that they sell in large quantities to each other. CETA fails on that ambition. Peak tariffs on both sides are in food and agriculture and both sides will maintain protection, even if export quotas will go up for a handful of products. Canada will maintain high tariffs on processed agricultural products. In addition, politically sensitive products will remain protected, also in the EU. CETA does not cover subsidies to farmers, which are equally trade distortive. Nor does it touch agricultural non-tariff barriers like labelling and food-safety regulation that drive up the cost of trade. So the CETA logic is this: for highly-protected goods that the two sides actually can sell to each other in large volumes (e.g. beef), CETA simply does not offer free trade. A CETA type of free trade arrangement is a long way from achieving the benefits of full involvement in Europe s single market, where harmonisation or mutual recognition is the norm rather than the odd exception. A CETA style agreement for the UK would therefore raise the country s technical barriers to trade with the EU, and that is far more damaging than tariffs for an economy attached to Europe s value chains. What should also be borne in mind is that a UK/EU FTA could take years to negotiate; it would, for example, have to be ratified by all 27 of the EU s national parliaments. Proponents of a CETA style FTA justify their position on the grounds that the EU has such arrangements with other parts of the world ignoring the reality that these are generally with developing and emerging countries and therefore of a oneway concession nature. CETA does not provide a relevant precedent for such an agreement with a developed major economy country that is a former member with a massively complex trading relationship with the rest of Europe. 5.4 Trading on the WTO basis Under a basic, no new trading relationship with the European Union, the UK would face the EU s full heavy tariff wall on food and agricultural products. Equally, the UK would have to impose its MFN tariffs on imports from the EU. Undoubtedly the UK Government would seek a unilateral MFN tariff reduction. While this might benefit consumers, it could be damaging for UK farmers and food processors. UK farm exports would face tariff barriers entering the EU, while at the same time facing greater competition from international suppliers such as Brazil and Asian exporters Brexit Analysis 2016 Informa Agribusiness Intelligence

10 Brexit: Impacts on UK and EU Agriculture Policy and Trade Chapter 5 Major considerations for the food and agriculture sector of application of the WTO s rules on UK trade: i) After any withdrawal from the EU, UK farm policy would not be able to return to the unfettered use of high levels of domestic support, export subsidies and import tariffs that insulate agricultural production from changes in world prices (see Appendix 3). Some limits will be imposed by the WTO rules on use of: (i) tariffs and other import management practices; (ii) non-tariff measures and (iii) domestic support and export subsidies. ii) It is difficult to determine what the ceiling on tariffs, domestic support and export subsidies will be. The WTO rules do not directly deal with a situation where one country withdraws from a CU like the EU, but remains in the WTO, although some rules covering changes in customs duties (Articles XXIV:6 and XXVIII:1 GATT) may apply by analogy. iii) If the UK simply takes over its proportion of the EU s existing Schedule of Commitments, questions remain whether the UK s commitments offer the same quality of access from world markets as they did when exporters to the UK could also obtain access to EU markets after their products entered the UK. This may require the UK to offer more favourable trade terms to affected countries as a compensatory adjustment in accordance with the WTO rules. The exact levels of compensation would be difficult to determine, as the rules do not state how such compensation is to be calculated. vi) If the UK is required to come to an agreement/negotiate with other WTO members on appropriate tariff and subsidy levels for agricultural products, then the agricultural sector may be somewhat exposed. The UK is not a big player in terms of international agricultural trade, so it may be that, as part of the UK s attempts to obtain more favourable trade terms in other sectors, the revised ceilings for domestic support and export subsidy commitments under the Agreement on Agriculture are set much lower than currently, together with lower import tariffs and more generous market access commitments (TRQs), with potential adverse knockon effects for the industry. v) If the UK were to seek an FTA agreement with the EU or with other WTO members (for example, to mirror the Transatlantic Trade and Investment Partnership between the EU and the USA), this would have to be done in conformity with WTO rules. There would be no need to agree common standards and regulation, but the UK would face the EU s common external tariff, which would damage UK trade with the EU in goods as well as services. Non-tariff barriers may emerge over time to damage trade in services in particular. Access to the UK market for EU exporters will obviously be influenced by UK trade policy towards non-eu countries. Therefore, an important consideration in post-brexit trade policy will be the most favoured nation (MFN) tariff the UK is likely to apply to imports from non-eu countries. This links to the question of the status of the EU free trade agreements (FTAs) and preferential trade agreements (PTAs) which currently give many third countries preferential access to the UK via EU agreements. It can be assumed that the UK would aim to maximise the trade advantage of adopting the most liberal arrangements with third country suppliers. It is most likely to lower tariffs on imports of agriculture and food Brexit Analysis 2016 Informa Agribusiness Intelligence 41

11 Chapter 5 Brexit: Impacts on UK and EU Agriculture Policy and Trade products. This would increase competition on the UK market for EU current suppliers and UK producers. UK free trade agreements with countries other than with the EU will be highly important. Questions arise over whether the UK could simply inherit the existing EU FTA agreements or whether it would have to re-negotiate these agreements with the third countries. It can be argued that on the basis that the UK has signed and ratified all agreements as a member state in addition to the EU, these agreements would continue, even if the UK were no longer a member of the EU. Partners in these agreements would not favour any change which would result in tariffs being re-imposed or raised on their exports to the UK. It is most likely therefore that existing third country access to the UK market would continue as before. Agricultural trade concessions now predominately take the form of tariff rate quotas (TRQs). While these would remain essentially EU concessions, UK imports under these TRQs, such as the New Zealand lamb and butter quotas and sugar imports from African countries, would have to be imported under a new arrangement. Following WTO rules, the UK could not simply operate these quotas on the existing basis as this would be discriminatory. Table 5.1: EU ad valorem import duties for agriculture and food products, by product group, 2013 Commodity group Number of lines Simple average (%) Tariff range (%) Share zeroduty lines Animals and livestock products Dairy products Fruit, vegetables, plants Coffee, tea, cocoa and preparations Cereals and preparations Oilseeds, fats, oils and products Sugars and confectionary Beverages, spirits, tobacco Cotton Other agricultural products Total agricultural products Source: WTO EU Trade Policy Review, 2013, Table Brexit Analysis 2016 Informa Agribusiness Intelligence

12 Brexit: Impacts on UK and EU Agriculture Policy and Trade Chapter 5 The UK could either reduce the relevant MFN tariffs, which would benefit all exporters, or open a new tariff rate quota as part of an FTA with those countries. It is likely that on the basis of historical links, the UK would establish early agreements with New Zealand, Australia and Canada on imports which could include more comprehensive concessions on agriculture and food imports than those existing under EU arrangements. The UK would also be likely to negotiate an FTA with Mercosur, which could allow, for example, much freer access for Brazilian beef and pigmeat to the UK market. UK trade policy outside the EU would thus result in greater competition on the UK market for producers in those EU countries that are current suppliers, such as Denmark and the Netherlands, as well as for domestic producers. Because approximately half of all agricultural tariffs are non-ad valorem, the exact ad valorem equivalent varies from year to year depending on the level of import prices. For example, the tariff on importing milk is or 18.80/100kg (depending on packaging units) which, if applied on imports of milk from Northern Ireland to the Republic s milk processors or supermarkets, would probably lead to the cessation of this trade, according to Professor Alan Matthews of Trinity College, Dublin. The UK s tariff policy post-brexit is likely to be more liberal than these EU tariffs and therefore lower or non-existent on basic food products. 5.5 Conclusion on future trade arrangements The arrangements which the UK eventually establishes with the EU and third countries may well not resemble any of these existing blueprints, but could contain elements of some or all of them. A recent UK Parliamentary Treasury Committee report points out that the UK s economic relationship with the EU may be different from these existing models: The UK s economic relationship with the EU is unlikely to be identical to that of any other country. As a large European country, the UK will seek, and probably be able to obtain, a unique arrangement. However, the terms of that arrangement would be constrained and conditioned by two forces: the views of other EU Member States and UK domestic opinion. The renegotiation of the UK s trading relationship with the EU will require a number of considerations to be balanced. These include access to the single market, free movement of people, contributions to the EU budget, the extent to which the UK needs to adopt EU rules and the extent of UK influence over those rules. Brexit Analysis 2016 Informa Agribusiness Intelligence 43