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Brexit Briefing: What are the trade implications for farmers of leaving the EU?

In the first of a Farmers Guardian series looking at the potential implications of Brexit for UK farming, Alistair Driver considers what it could mean for UK agriculture’s multi-billion pound global trade links.

In a world where global trade in food and farm products is becoming ever-more important, the stakes could barely be higher for UK farmers when the public goes to the polls on EU referendum day.

 

The UK exports nearly £18 billion of food, drink and animal feed products each, 60 per cent of which goes to the EU. Twice as much comes the other way.

 

Brexit would force the renegotiation - over a number of years - of the UK’s trading relationship with the EU and other non-EU countries.

 

But would this bring new threats, costs and uncertainty to the farming sector? Or freedom and new opportunity?

What is at stake?

As a member of the EU since 1973, the UK has been part of the single market, with is ’four freedoms’ - the free movement of people, goods, services and capital.

 

There are no tariffs or border controls when goods are traded between member states, reducing costs, and common rules and standards apply.

 

The EU, as a Customs Union, imposes tariffs on goods coming into the EU to protect its own producers, with different rates for set for different products and different exporters.

 

The EU also negotiates trade deals with others parts of the world on behalf of all its members.

 

EU-UK trade in numbers

According to figures for 2014 compiled by AHDB:

 

  • UK food, drink and animal feed exports were worth nearly £17.8 billion
  • About £10.7bn - 60 per cent - went to EU countries.
  • £37bn of food, drink and animal feed was imported
  • This included £26.5bn from the EU
  • Seven of the top eight countries we export food, drink and feed to are in the EU.
  • These are led by the Republic of Ireland (£3.4bn) and France (£2.1bn), Netherlands (£1.3bn) and Germany (£1.2bn) .
  • The US, in third place (£1.9bn) is the odd one out, with Hong Kong and the UAE in ninth and tenth place.
  • Nine of the top 10 countries we import from are in the EU, led by Netherlands (£4.9bn) France (£4.2bn) and the Irish Republic (3.8bn).

EU trade by sector (£ million)

Click on the graph for a larger version

 

Source: ADHB

For some sectors EU trade is particularly important, either as a destination or competitive threat. For example:

 

  • 38 per cent of UK lamb goes to the EU, with France accounting for nearly 60 per cent of exports
  • 93 per cent of beef exports and 92 per cent of sheepmeat exports go to the EU
  • The Irish Rebublic and the Netherlands are the top destinations for beef exports
  • 100 per cent of pigmeat imports and 98 per cent of dairy imports come from the EU

EU trade with the rest of the world

  • The biggest destination for EU food, drink and animal feed exports is the US (€14.4bn)
  • This is followed by Russia (€6.3bn), China (€5.6bn), Switzerland (€5.3bn) and Japan (€4.6bn)
  • Brazil is the biggest importer to the EU (€6.7bn), followed by the US (€4.9bn).
  • The next biggest are Argentina (€4.3bn), Switzerland (€4.1bn)and China (€3.7bn)

After Brexit - the EU trading options

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According to Farming Minister George Eustice, flying the farming flag for ‘leave’, it should be ‘relatively easy to roll forward something akin to the single market arrangement we have now’.

 

For others, including former CLA chief economist Allan Buckwell, in a report on the implications of Brexit for farming, it is not so straightforward.

 

He said the UK would face a trade-off between retaining single market access and freeing itself from EU regulation.

 

He said: "The EU trade question is fundamentally a choice between remaining close to the EU single market, and therefore having to retain most EU existing regulation, or leaving the single market in order to allow some deregulation."

The trading options

There would be various options available to the UK, including some based on existing precedents.

 

European Free Trade Association (EFTA): The UK could join the four members of EFTA – Iceland, Norway, Switzerland and Lichtenstein. It was after all, a member of EFTA before it joined the EU.

 

These countries have a trading agreement with the EU allowing the free movement of goods, services, people and capital.

 

European Economic Area (EEA): Iceland, Norway and Lichtenstein are, additionally, members of the EEA, which grants access to the EU single market.

 

In return, they have to comply with large swathes of EU law. NFU chief economist Gail Soutar pointed out Norway, for example, has to comply with virtually all major EU regulations UK farmers have to comply with.

 

These including the Water Frameworks Directive, the Nitrates Directive, sheep EID, pig and poultry welfare rules and food safety standards.

 

The only one Norwegian farmers do not have to comply with is the Habitats Directive because Norway’s domestic rules go further.

 

They also make significant contributions to EU costs. Norway also pays in more than £500 million a year to the EU – about £106/head, compared with £153 per capita for the UK.

 

The Swiss model: Switzerland is not part of the EEA, but has negotiated access to the EU single market for goods.

 

It does not have to adopt EU regulations, but has to apply equivalent forms of regulation when trading with the EU. It also contributes to the EU budget.

 

EEA light: According to Prof Buckwell, the UK could adopt an ‘EEA light’ version - which he describes as a 'midway point between Norway and Switzerland - where single market rules would only apply to exports to the EU.

 

Turkish model: The UK could follow Turkey’s example and join, or effectively remain in, the European customs union, giving access to the single market but requiring compliance with regulation.

 

However, according to Ms Soutar, the UK Government has already concluded it does not want to go down these routes because of the requirement to comply with EU law, but with no real say in shaping it.

 

So what are the other options?

 

No special deal: An extreme option would be not to pursue any special deal with the EU and accept the same conditions as, for example the USA, has to comply with under the World Trade Agreement.

 

New trade deal: An option favoured by many would be to negotiate a Free Trade Area (FTA) with the EU,‘but without all the constraints as accepted by the Swiss and Norway in their agreements.

 

This could involve, for example, free movement of goods, with no tariffs on farm goods, but not of labour, Prof Buckwell said.

trade off

Trade deal, trade-offs

An new bilateral free trade agreement, might extend most of the UK’s current access to the single market but would come with trading costs, Prof Buckwell said.

 

All other options beyond those negotiated by the likes of Norway and Switzerland 'imply that trade with the EU will involve dealing with border and customs controls, possible regulatory and labelling issues and in some cases customs tariffs', he said.

 

"In short, they involve what are referred to as higher trade facilitation costs," he said. "How big these costs are and to which products they specifically apply will be determined by the negotiations."

 

Under all options, he added, if the UK wishes to export products to the EU, suppliers will have to meet EU regulations, standards and labelling for such products - even if full regulatory compliance is not required.

 

In these cases, it would be up to producers to gauge whether it was worth going through the extra hoops for some or all of their production to access the EU market, he said.

 

It is also likely to have to continue contributing to EU costs.

 

This 'trade policy dilemma' was also explored by Professor Alan Matthews of Trinity College, Dublin at the recent AHDB Outlook Conference on Brexit.

 

  • In order to pursue a different regulatory approach from the EU, trade costs would increase, he said.
  • To keep costs down would require a Norway-style EEA membership approach covering agriculture, requiring fairly full compliance with EU rules.

 

A summary of his paper on the NFU website can be seen here.

 

Ms Soutar said there was a great deal of uncertainty over which model the UK would adopt.

 

She said: "None of the existing alternative models to EU membership, for countries like Norway, Switzerland or Turkey, cover trade in agricultural products.

 

"So there is no precedent to include all agricultural trade in these agreements.

 

"It's more likely that the UK would seek to negotiate a bespoke agreement covering as much existing free trade between the EU and UK as possible."

Negotiations will be key

Whatever route the UK goes down in terms of its relations with the EU, a great deal will depend on the finer details of the negotiations.

 

There is a formal period of two years to negotiate new post-Brexit arrangements.

 

In its report on the process of leaving the EU, the Government said it would be 'difficult to complete a successful negotiation before the two year deadline expired'.

 

An extension of the two-year would require the unanimous agreement of the other 27 member states, which would not be guaranteed.

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The report said the UK’s withdrawal from the EU would have a serious impact on UK farmers, partly because they would lose their preferential access to the EU market if the UK left the EU without a successor arrangement in place.

 

Defra Secretary Liz Truss warned trade would revert to the World Trade Organisation default rules if no deal was reached after two years.

 

Citing the report, she said this would see 'crippling' import tariffs imposed on goods exported to the EU, she warned.

 

But Mr Eustice was adamant there would be a will on both sides to sustain trading arrangements that would continue to benefit UK and EU producers.

 

He said: “We have a trade deficit with the EU of about £60bn a year. It is not in their interests to pull up the drawbridge.

 

"Rolling forward some sort of arrangement akin to the existing single market is the easy bit to do.”

 

"Because we have been in the EU we have a very harmonised legal structure. If we left the EU that would remain as a legacy."

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But former Liberal Democrat MEP George Lyon, campaigning to stay in the EU, had other ideas.

 

“Do we honestly believe the French and other Southern European countries who are very protective of their farmers will give us as good a deal on access to their markets as we currently have? I suspect the answer is no.”

 

Prof Buckwell predicted the parties would begin the negotiations with very different mindsets, particularly as the UK would have just 'dumped' the EU because it 'had been acting as a drag on British economy and society'.

 

EU policymakers' first thought would be to protect would be keen to protect their own markets, he said.

Non-EU trade

The EU has negotiated preferential trade agreements with 48 countries and is in ongoing negotiations with a further 84 countries. It is considering opening negotiations with another seven, including China.

 

It is also in the process of negotiating the Transatlantic Trade and Investment Partnership agreement with the US.

 

Another big question is the extent to which the UK would be able to match, or surpass, the trade access the EU has negotiated with other countries - and how long this would take.

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Former Defra Secretary Owen Paterson, a prominent figure in the ‘leave’ campaign, said the UK would be in a good position to negotiate new bilateral trade deals, for example with ‘like-minded’ countries such as the US, Canada, Australia and New Zealand.

 

The UK is currently represented by just 1/28th of a seat by the EU at the WTO, he said. At the heart of his argument was the belief that, ‘freed from the encumbrance of the EU’, the UK would gain more power in the global market and on the world’s political institutions.

 

In a post-EU world, the UK would still ‘enjoy access to the EU, trading freely with European neighbours’ but would be in a position to develop new bi-lateral trade deals without waiting for ‘lengthy all-encompassing treaties such as TTIP’, Mr Paterson said.

 

But others, including Mrs Truss, highlight the uncertainty of the global trading situation.

 

Until it concluded equivalent agreements, UK exports would face the so-called ‘Most Favoured Nation’ tariffs under the World Trade Organisation framework.

 

The sector would face a period of uncertainty and potentially higher costs, while these deals are negotiated.

 

"We would have to negotiate new trade agreements with 53 individual nations which are currently agreed through the EU. This would not be easy or fast,” Mrs Truss said.

 

"While these deals are debated our food and farming industry would face damaging uncertainty."

Others, including EU Agriculture Commissioner Phil Hogan, claimed the UK would never be able to match the EU’s collective bargaining power in securing important free trade agreements.

 

He said: “How would Britain with a population of 60 million fare in negotiating with countries like China, with a population of 1.3 billion? In the EU it punched at a weight of 500m.”

 

"It would take the UK 10 to 15 years to negotiate some of these deals. What are they going to do in the meantime?”

 

But the UK Independence Party is confident the UK would be in a strong trading position post-Brexit.

 

It said: "We will regain full autonomy at the World Customs Organisation, the Organisation for Security and Cooperation in Europe, and several of the UN’s constituent bodies.

 

"With over 100 other international organisations counting the UK as a full member, we will be in a very strong negotiating position when we leave the EU."

Import protection

The EU currently applies a range of tariffs to agricultural products coming from outside countries to protect its producers.

 

In 2014, the EU’s average tariff for all agricultural products was 12.2 per cent, but this masked variation – dairy tariffs averaged 42.1 per cent, while the average meat and meat product tariff was 17.7 per cent, the NFU said.

 

Tariffs could be as high as 40 per cent for lamb and 70 per cent for beef, Mrs Truss said.

 

Under World Trade Organisation rules, the UK Government could not increase existing tariffs, but it may choose to reduce them.

 

The concern is that if the UK did reduce tariffs, it could leave domestic producers more exposed to competition from imports.

 

While consumers could see the benefits of this in terms of lower prices, it could also have the potentially damaging effect of pushing down farmgate prices.

 

Prof Buckwell suggested this could be a concern to the EU negotiators post-Brexit.

 

He said: "They will be concerned ensure that their own protected markets are not breached by cheaper imports originating outside Europe and consigned to the EU via a newly liberalised UK."

 

Ms Soutar said: “Whether the UK would seek to reduce consumer costs by reducing tariffs or to support elements of the industry by granting them tariff protection is yet to be seen.”

 

In summary... 

Prof Buckwell summed up the pros and cons and the big questions facing farmers as far as post-Brexit trade is concerned.

 

The three big questions he posed for farmers are:

 

  • Do UK exporters have unfettered access to the single market, and therefore do EU producers have the same access to our market?
  • Do we have to continue to apply all/most EU regulations? Does this apply for all UK production, or just for UK exports to the EU?
  • Do third country exporters have same, better or worse access to the UK market for agricultural products, and vice versa for UK exporters?

 

There will not be clarity on the answers to these questions until quite a way into the withdrawal negotiations, he warned.

 

He concluded: "As far as trade with the EU is concerned, the UK currently enjoys the best possible access to the single market as a full EU member, therefore any alternative arrangement must involve higher frictions and trading costs.

 

"Whether this can be offset by easier access to third country markets (and vice versa) will depends on the trade agreements negotiated by the UK on its own which could take many years to achieve.

 

"Likewise, whether the additional trade costs can be offset by lower regulatory burden is another matter which will take many years to discover."

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